HSBC: 'Died down' ETF outflows to push gold price back above $1,600

James Steel, chief commodities analyst at HSBC in New York, is holding his positive line on the price of gold and forecasts a rise to $1,600 an ounce in the second half of the year.

Steel said in a Bloomberg interview two opposing forces are keeping gold rangebound near the $1,400 level at the moment.

On the negative side are the unprecedented redemptions of exchange traded funds backed by gold.

After 17 weeks of straight net selling, holdings have declined to the lowest in more than two years at 2,118 tonnes – down from a record 2,632 tonnes or 93 million ounces in December 2012.

Steel says most institutional investors who wanted to exit the market may now have done so and the selling has now died down.

On the upside, gold is being boosted by strong physical demand for coins and bars around the world, most notably from China, which should push the gold price back to $1,600 later in the year says Steel.

Earlier this week China approved two domestic gold-backed ETFs.

Jewellery demand is also expected to be relatively strong and while Indian demand has been weak due to the slumping rupee, incomes in that country is still rising and demand will come back.

Gold has also been hurt by the expectations that the US Federal Reserve will start to unwind its quantitative easing program, but Steel points out a tapering off is very different from an exit and that QE may provide a floor for gold for a long time to come.

Steel believes gold will average $1,542 in 2013 and longer term he is on record as saying that gold will rise to over $2,000 an ounce.

Gold has declined fell 17% this year and on Friday was changing hands for $1,387 an ounce in New York. The metal is down 28% for a record $1,921 set in September of 2011.

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