Gold likely to cross $1,500 mark

As the precious metal approaches its tenth consecutive price gain, several factors are set to push it even higher

Dubai: For the past nine years, investors have found gold to be, well, as good as gold in terms of annual returns.

And the metal is on the cusp of its tenth annual increase this year as it powers to analysts' expectations of $1,300 (Dh4,775) per ounce over the next four months and possibly $1,500 by the first quarter of 2012.

Gold prices have strengthened 11 per cent this year, touching a record in June.

Although the past few weeks have seen them decline, physical demand from India, the world's largest gold consumer, may put a floor under the price as the festival season gets under way, according to Eugen Weinberg, head of commodity research at Commerzbank.

August 24 marked the start of the gold-gifting season in India with the Raksha Bandhan festival, and on the horizon are Dussehra, Dhanteras/Diwali - the mother of all gold-buying periods - and then the marriage season followed by Christmas.

Obviously, festival demand is not the only thing that has kept the price of gold moving in an upward direction over the past 10 years.

Safe-haven

Its value as a safe-haven investment has seen institutional investors and central banks of countries increase their holdings of the precious metal as economic uncertainty continues to plague other financial instruments such as stocks.

The Reserve Bank of India, for instance, bought as much as 200 tonnes of gold at the end of last year from the International Monetary Fund for $6.7 billion, when prices were hovering just above $1,000 per ounce.

The deal increased India's gold holdings to the tenth largest among central banks. It also fuelled speculation that other governments - including China - may be ready to diversify their reserves even at near-record gold prices.

India, according to the World Gold Council (WGC), has the world's largest demand for gold. Statistics compiled by WGC for the second quarter of this year indicate that jewellery demand in India remains healthier than in 2009.

The WGC anticipates demand will pick up as summer ends.

The second quarter of 2010 was marred by mixed economic news, heightening concerns that a double-dip recession may be a distinct possibility and that global economic recovery may be slower to come than previously anticipated.

While global equities fell, demand for assets such as US Treasuries and gold, which tend to perform well in periods of crisis, increased.

Yuan regime

The WGC expects that the intention by the People's Bank of China to gradually increase the flexibility of the yuan regime will be positive for the Chinese gold consumer.

These factors have all come together to goad analysts into sanguinary predictions about gold prices.

Merrill Lynch, probably the first investment bank to predict in 2008 that gold prices would hit $1,500 per ounce in three years, last week maintained this forecast.

"We still expect gold prices to hit $1,500 per ounce over the next 18 months. But the path to $1,500 will not necessarily be smooth, as gold can reflect several macro variables at once," Francisco Blanch, commodity strategist at Merrill Lynch said in a note sent to Gulf News.

"This is because the yellow metal has been the ultimate store of value over thousands of years. During the last decade, however, we found that three variables alone could explain the fluctuations in the price of gold: risk, currency and commodity prices.

'Elusive question'

"In a nutshell, our analysis shows that gold is sometimes a currency, sometimes a commodity and sometimes a store of value. Of course, the elusive question will always be figuring out which market gold will track next," Blanch said.

If gold prices were to rally above $1,500, the move would probably come on the back of sovereign debt fears, inflation or an economic catastrophe.

"Hence, the yellow metal remains a golden bullet for a diversified portfolio when it comes to tail risk. And of course, most investors should be happy to see gold prices drop, as a decline in bullion would likely entail significant gains in other parts of a diversified portfolio," Blanch said.

Regional commodities trackers are not totally convinced, although they do see strength in gold in the sort to medium term.

"The fear that the global recovery may be losing steam and that it will bring about a potential bout of deflation is being used as the acknowledged catalyst for higher bullion prices," Pradeep Unni, vice-president at Richcomm Global Services DMCC, told Gulf News.

This fear isn't without a reason, he said. Growth has been quite fragile in the key economies and the US leads in this decline.

Recent data has revealed that the US weekly jobless claims surged to a fresh yearly high of 500,000 versus forecasts of 474,000.

Property clouds

"Like the job market, recovery in the manufacturing sector and the housing market has slowed significantly and the latest numbers show that clouds continue to hover over the real estate sector," Unni said.

"Investors thus have little option to hedge a probable and potential economic recession by investing in a hard asset like gold," he said.

"Additionally in the coming months, key festivals are scheduled both in India and Middle East and during these festivals, gold is purchased."

Increased investor interest in gold, Unni said, is visible from the growing number of requests his firm receives for trading and investing in the commodity on the Dubai Gold and Commodities Exchange.

Other such firms confirm the widening base of gold investors.

Sajith Kumar P.K., chief executive and director at JRG International Brokerage DMCC, told Gulf News that demand for gold is coming from across the board.

"The retail investor is working the metal like a systematic investment plan, or SIP. They are buying at every decline in order to average down their acquisition cost. This is driving up demand," Sajith Kumar said.

He also identifies the "treasury investor" as a significant source of demand and forecasts that the price of gold will hit $1,300 per ounce by December 31.

"The maximum demand is from safe-haven investors. Gold is considered a safer investment than bank deposits, real estate and shares.

"More investible funds are going to gold - not just jewellery but also coins and bars," Sajith Kumar said.

"Portfolio managers and fund managers are preferring gold in order to show better performance on their funds on a quarterly basis. Trusts are also entering the market," he said.

'Economic cycle'

Asked whether he agrees with the Merrill Lynch forecast of $1,500 by the end of next year, Sajith Kumar said: "We see an increase of 20 to 25 per cent in demand. $1,500 depends on the next economic cycle and confidence in government steps to support recovery.

"It is likely that funds focused on the Brazil, Russia, India, China, or BRIC, markets will turn their attention to equity next year as economic growth in these regions picks up steam.

That will mean gold demand may ease off."

Low volatility

Economic uncertainty has translated into price volatility in stocks, bonds and other instruments over the past few years. Gold has outperformed the others on volatility.

This was highlighted in the second quarter of this year.

According to data collated by the World Gold Council, many financial assets, especially in Europe, suffered losses as risk aversion, credit concerns and disappointing economic news prompted investors to seek refuge in hard assets such as gold.

US Treasuries, as measured by the Barclays US Treasuries aggregate index, also rose 4.7 per cent over the quarter.

Conversely, the S&P 500 total return index and the MSCI World ex-US Index (which is heavily weighted towards European equities) fell by 11.9 per cent and 14.5 per cent, respectively, in US dollar terms.

During the same period, the S&P Goldman Sachs Commodities Spot Index (S&P GSCI) fell by 6.6 per cent, as industrial commodities retreated as a result of slower than anticipated economic growth.

The price of oil fell by 9.1 per cent to $73.87 per barrel by the end of the second quarter from $81.30 in the previous quarter.

On a risk-adjusted basis, gold outperformed all of these assets except US Treasuries, as gold's average annualised volatility at 15.8 per cent remained much lower than many of the equity indices which hovered around the 25 per cent mark.

Are you investing in gold? Do you think it's price is already too high? Do you consider it to be a safe investment.

Source : Gulfnews