According to UBS commodity strategist Julien Garran, the gold market is approaching "High Noon."
That's the moment closer to the middle of 2013 when investors are going to have to make a decision on what they think the Federal Reserve is going to do with regard to quantitative easing in the second half of the year.
Garran writes in a new report on commodities that at that point, " the outlook for the rest of the year depends critically on whether the Fed 'blinks first' and stops QE, or whether the global economy 'blinks' and we see a slowdown in global growth momentum into 3Q13 while QE3 is continuing."
For his part, Garran thinks the latter scenario – slowing global growth and continued QE – will win out.
"That sets up a major gold rally in Q3," he writes in the report.
The call is predicated on higher oil prices and bond yields by mid-year, squeezing the U.S. consumer. At the same time, a synchronized global restocking cycle should be coming to an end.
Couple those factors with the potential for Chinese authorities to tighten in order to combat rising house prices and inflation, and you have your global slowdown.
In the report, Garran writes:
Markets will see slowing growth & deflationary pressure in markets – and they will start to think that QE needs to be larger, and to last for longer. And our view on gold is that it predicts whether we will see reflation or dis/de-flation in six months time. Gold corrected from September 2012 to now because a recovering US economy reduced the need for extended QE. A slowdown in Q3 would raise the need again. It would put us in the bottom left quadrant of our gold investment clock – when gold rallies when most other risk assets correct.
Below is the "gold investment clock."
Garran admits that his team has been too bullish on gold recently, and that crucially, this call hinges on both continued QE from the Fed and a global slowdown in the second half of 2013.
"But for the reasons we set out above – from where we stand," Garran writes, "the most likely outcome of ‘High Noon’ towards mid-2013, is that markets and cyclical beta will sell off after a good run, and gold will run hard in its place."
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