Don't see gold touching $1,100/oz by year-end: UBS

Tom Price, commodity analyst at UBS believes USD 1,200-1,200 per ounce will act as a fundamental support for gold.

Gold fell on Friday for a seventh straight session, in its longest losing streak since March 2009, as the dollar strengthened and investors cut exposure to the precious metal, fearing further drops and choosing equities instead.

The yellow metal has lost nearly 6 percent of its value in the six sessions through Thursday as stocks gained on the back of strong US economic data, and on fears the Federal Reserve could end its bullion-friendly bond buying programme.

In a new note to clients, Credit Suisse's Ric Deverall forecasted that gold would plunge to USD 1,100 this year and eventually to USD 1,000 within five years.

However, according to Price, gold is not likely to see USD 1,000 per ounce anytime this year. “In our research we believe that USD 1,100 is the fundamental support, but that is not supposed to kick-in for another 4-5 years,” he told CNBC-TV18.

Also read: Gold to face more selling pressure: IIFL

Below is the verbatim transcript of his interview to CNBC-TV18

Q: What is your stance on gold after a very sharp correction and the continued bouts of weakness that we have seen of late?

A: It has been interesting. It held at USD 1,800, then it has corrected very substantially mainly because of question marks about the need for more QE in the US. The only supports were some sort of crisis occurring in Europe, but now after the correction that occurred in middle of April the only real support that we can see in the trade is retail buying.

I just do not think that is substantial enough. So, now the sort of things I am talking to my clients about is marginal cost of production support, which is a fundamental support in gold and that is about USD 1,200-1,250 an ounce.

Q: That is just what I was coming to. Retail trends both from India and China are probably at an all-time high in terms of purchases. Don’t you think that is going to provide any cushion to the prices you were talking about and how soon do you think gold could slip to the levels you just mentioned?

A: We saw a correction in April that took it to USD 1,320. Then it recovered a USD 100 on retail buying, but that does not seem to be substantial enough. What are the sorts of things that retail buying is up against. ETF outflows are probably the most potent driver of downside risk for gold. Central bank buying is not enough either and they are really the two biggest counter forces that retail buying is up against.

As the price indicates retail buying is basically losing out at this stage. So USD 1,200-1,250 an ounce is the numbers that the gold producers believe that is the support level. If you are an economist USD 1,200-1,250 an ounce at the marginal cost of production means if the price falls below that you start seeing gold production being cut.

Usually, when production of any commodity, good or service is cut from the trade then that tends to be the next and probably the last support for the price signal. We are not there yet, but it is certainly a number that we are hearing talked about more in the market.

Q: Last evening Credit Suisse talked about a target of USD 1,100 by the end of the year. Does that seem like a reasonable level for gold to get to?

A: It seems very bearish given just where we have been in the last few months. It does happen to be our long-term price at UBS. That is a number that we came up with based on a form of marginal cost analysis. It is a return on capital expenditure, sustaining capital expenditure and operational expenditure for the next round of projects expected to come into the market.

So, in our minds and in our research we believe that USD 1,100 is the fundamental support, but that is not supposed to kick-in for another 4-5 years. So, to think of a number of USD 1,100 by the end of this year is extremely bearish. What that would mean is that we have seen no inflation anywhere in the world.

We saw a strong lift in the US dollar, so their economy must be performing well. Other thing that would probably take it to USD 1,100 by the end of the year is some sort of growth being seen in Europe and China doing okay. So, all the major regions basically reporting robust industrial activity and the concern about safe havens and inflation start to diminish and people start thinking about genuine economic growth. That is the sort of scenario that would probably take gold to USD 1,100.

Q: At this point does this big crack in gold have ramifications for any other asset especially in the commodity universe or do you think it is a problem that is individual to gold and probably a function of what is happening with risk levels as well?

A: The correction that we have seen in the price points towards the fact that in the market there is no evidence of inflation. People are feeling more positive about the US outlook that is certainly the house view of UBS.

So, if you are looking at news reports over the next couple of months on the gold trade you would really be looking for Bernanke in the US highlighting inflation risk. That is possibly the next upside driver for the gold price. Some sort of evidence that inflation comes through and the US has not quite matched the pullback in their QE program, so they are still pumping money into the market.

That creates an inflationary problem and that would be a sort of support that gold would made. In the absence of that and for the crisis out of Europe it is really downside risk for gold.

Q: What do you foresee for crude, a commodity that has much more important ramifications for a market and economy like ours? Is it stabilising here or is that one as well set for a fall?

A: The signal for Asia to watch really is probably Brent at a global level. West Texas Intermediate (WTI) tends to be more of a US oil signal. Brent is holding at just above USD 100/barrel. It tends to reflect a robust demand growth at this stage. We forecast the number of USD 105-110 over the next couple of years. We believe there is adequate supply.

It is a balanced trade outlook and we are generally bullish on global economic growth going forward. So, we are thinking of numbers of above USD 100/barrel. For WTI we think of numbers if USD 90-95 over the same period of time. There are adequate inventories in the US so that tends to be the more subdued price outlook. They are very stable in our outlook and the sorts of things that could bring the prices down is some sort of relentless left out of the Organization of Petroleum Exporting Countries (OPEC) regions.

The less likely scenario of upside risk as the surprise growth driver out of China or US economic growth figure with a GDP number of above 2 percent Y-o-Y that would probably report a higher oil price. However, at this stage the risk is probably to the downside for numbers of USD 95 for WTI and USD 105 for Brent that is what we are thinking.