Investment research firm Sterne Agee published a report titled “Geopolitics, Fed and Technicala Aid Gold Price”, on Monday, June, 23rd. SA analysts Michael S. Dudas and colleagues suggest that a number factors are aligning to support gold prices. They believe gold prices will average around $1300 an ounce in 2014, with an upward bias, and continue moving up to average $1400 an ounce in 2015.

Gold Prices

Gold safe haven from geopolitical concerns

Dudas et al argue “political turmoil in the Middle East, Ukraine and Russia have boosted safe haven demand for gold.” They also point out gold is typically seen as a hedge against inflationary pressures created by rising oil prices, and that oil prices have also “rallied on concerns surrounding Iraq crude exports, stoking energy inflation fears.”

The report also mentions that Chinese gold demand has weakened over the last few months, but that this is largely due to seasonal factors. Moreover, the China Gold Association still expects the private sector to consume more than 1,000 metric tons this year. There have been early signs of an uptick in gold demand in India, based on signals from the new government about relaxing import restrictions and/or duties.

gold

Gold and extremely low interest rates

The report points out that the Federal Reserve Board recently making clear it was continuing its ongoing accommodative policy has helped fuel the recent gold price rise. The SA analysts say this indicates “that real interest rates would remain low to negative for a while.” They also mention that the U.S. dollar dropped to a one-month low following the Fed statement. Last but not least, they also note ECB took the unprecedented step of cutting interest rates to negative last week.

Gold price technical pattern

Gold Prices technical pattern

The technical picture is also very bullish for gold. The analysts point out that gold prices broke above the important 50- and 200-day moving averages last week, likely because “$1,300 was a crucial price point at which buy stop orders probably got triggered.”

SA’s Chief Market Technician Carter Braxton Worth also believes the gold chart pattern is very bullish right now. First, gold prices have been making higher lows; second, the 150 DMA (day moving average) looks like it’s bottomed out, with the completion of the bottoming-out suggesting a medium-term move to the $1500 level.

Gold miners

gold

Gold mining shares are also rallying. The gold mining is up 16% month-to-date (MTD) versus a mere 6% increase in gold prices MTD. Dudas et al argue that as mining firms continue to cut costs, and “capital successes and goals show a more sustainable business model going forward”, that the “gross underperformance” of mining shares relative to the overall market over the last couple of years can be significantly reversed. Sterne rates  rate Agnico-Eagle Mines, Coeur Mining, Gold Resources and Newmont Mining as Buys, with Barrick Gold, Hecla Mining and Pan American Silver as Neutral.