Gold soared almost 3 percent to a two-and-a-half week high on Thursday after dovish comments from Federal Reserve Chairman Ben Bernanke, but analysts are still not convinced the metal is a good long-term buy.
Bernanke stressed on Wednesday that U.S. monetary policy would remain “highly accommodative for the foreseeable future”, in order to combat stubbornly high unemployment. His comments sparked a rally in bullion, which has now clocked its longest winning streak since April.
However, analysts said the rally, which saw gold prices reach $1,298 per troy ounce on Thursday, is unsustainable, and more downside should be expected.
Gary Clark, analyst at Roubini Global Economics, said the rally offered a good selling opportunity, and said gold prices were too unstable for investors to consider a buy-and-hold strategy.
“I see these rallies in the gold price still as selling opportunities. The current rally is really being driven by tightness in the physical market and that has been reflected by a rise of gold lease rates, and also the more accommodative language coming from Ben Bernanke,” Clark told CNBC.
Clark said that while gold lease rates were at their highest level since the financial crisis, this will not drive prices higher in the long-term.
“On this occasion, its more idiosyncratic factors to do with supply which are driving up those lease rates, driving up the gold price at the moment. But we haven’t seen a rise in tail risk, so that rally should not be sustained,” he said.
Chris Watling, CEO of Longview Economics, agreed that there was no strong case to be a long-term buyer of the precious metal, even though it has fallen considerably from its 2011 highs, when it peaked at $1,900. He warned that gold could prove to be a bubble that “will fully deflate”, sending prices back to $300-$400 per ounce.
“One has to be a long-term buyer surely, but what makes you a long term buyer of gold and at what price? Not at these levels,” said Watling.
Clark added that gold prices, which remain 25 percent lower on the year, would not stabilize before the end of 2014, as real interest rates are nowhere near normalizing.
“The gold price is very much driven by the real rate. There is a lot of volatility in the real rate at the moment, as a result of the QE3 [the third round of quantitative easing] tapering talk, and we are not going to see normalization until the end of next year,” he said.
The minutes from the Federal Open Market Committee (FOMC) revealed a split between members over when to start easing off the $85 billion a month asset-buying program. Around half of the 19 members wanted tapering to start soon, while “many” others were in favor of the Fed continuing asset purchases into 2014.
“I think gold investors really should be positioning for a U.S. recovery, and the end of QE and a renormalization of rates,” said Clark. “At that point, the gold price will have fallen to a level which is more sustainable. It still has an important role to play as a hedge against inflation and tail risk, but I think there is further to go on the downside.”