As gold pulls back under $1700, back to 6 week lows (and Silver collapses in its high beta way, reverting back in line with Gold), Morgan Stanley says 'Stay Long Gold'. The recent sell-off notwithstanding, they remain bullish through 2012 and while the current USD strength is a headwind, they expect aggressive Fed action (and other global central banks), including the likely adoption of QE3 in 1H12, to be gold positive. Deciphering the demand and supply dynamics, they forecast prices to rise on a quarterly average basis through 4Q13 as the four pillars of their bull market thesis persist.
- In our view, the timing of the sell-off in late December suggests strong selling pressure linked to year-end book squaring, portfolio adjustments and commodity index reweighting. Furthermore, the sell-off also coincided with an especially sharp rally in the TWI of the USD, a strong headwind for gold given its USD pricing and quasicurrency function.
- While we expect European funding stress to continue in early 2012, recent coordinated actions by six central banks and separate actions by the ECB suggest that non-gold related measures to ease access to USD swaps will be successful, reducing downside pressure on the gold price.
Consequently, gold prices will again depend on whether the four pillars of the original bull market persist:
- (i) decline in producer hedging (and potentially de-hedging as a positive demand factor);
- (ii) the decline of DM central bank sales and rise of EM central bank purchases;
- (iii) the inability of gold mining companies to increase gold supplies materially; and
- (iv) long-term growth in physical investment demand.
- Constrained new gold supply is placing greater emphasis on the increased delivery of above-ground stocks to meet demand. However, in the absence of central bank sales, and limitations on the size of the available scrap pool, the continuation of physical demand growth from ETFs and coin sales is putting upside tension on the market, ensuring the bull market is sustained into 2012-13.