Gold on course to make history
An ill wind blowing through financial markets is breathing vigor into gold.
26 August 2010
Reuters
An ill wind blowing through financial markets is breathing vigor into gold,
which could mark record highs for the third time this year in September -- or
sooner -- as fundamental and technical factors align.
A spate of unimpressive economic data from the United States has raised
expectations the world's biggest economy will keep interest rates low for an
extended period, and may have to extend its quantitative easing program to buoy
growth.
Meanwhile a fresh ratings downgrade of Ireland has shown worries over the euro
zone's fiscal health are far from over.
"Gold is at a fantastic point right now," said Ashok Shah, chief investment
officer at London & Capital. "All kinds of indicators are showing that things
are gradually slowing down."
"That increases the prospect of more quantitive easing," he said. "In essence,
that's great for gold."
Gold has hit records twice already in 2010, scoring its current peak of
$1,264.90 in June as the euro zone sovereign debt crisis sparked flights to
safety. Investors worried that monetary loosening would ultimately prove
inflationary.
The inflation story has so far been treated with caution, as with the more
immediate focus on deflation. But if economic growth stalls, that may change.
"Should we see further deterioration and another round of significant stimulus,
inflation will sneak closer to the front of investors' minds and that would be
positive for the gold story," said RBS analyst Daniel Major.
"Should we see a meltdown in economic data stimulating significant safe haven
inflows and gold breaks above its recent highs we could see significant further
gains," he added.
The metal's latest swing higher after a retracement in June and July has
improved its technical picture. Commerzbank analyst Axel Rudolph said gold's
bounce off this week's low at $1,210 was positive, with $1,250 targeted before
the June high. Barclays Capital projects $1,350 and higher later this year.
Spot gold is currently near 8-week highs of $1,244 an ounce. Significantly, gold
is also rising in non-dollar terms.
Euro-priced gold, which hit an all-time high above 1,050 euros an ounce in June,
rose back above 980 euros again this week for the first time since July 1.
Sterling-priced gold has also risen back above 800 pounds an ounce.
"It's really on the crosses where you want to see (gold) performing," said Simon
Weeks, head of precious metals at the Bank of Nova Scotia. "I would definitely
expect new highs."
OPTIMISM EMERGES
This rally has the benefit of coming at a time when more optimism is emerging
about the jewelry market, which has come under heavy pressure in recent years
from high prices.
According to the World Gold Council, global jewelry demand in the first half of
2010 was 16 percent higher than the same period of 2009 despite a 24 percent
rise in U.S. dollar prices.
"Jewelry consumers have become accustomed to the higher price," said the WGC's
Eily Ong.
Indian buying usually rises during the festive season, which began this week
with Raksha Bandhan and runs until Dhanteras in November, the biggest
gold-buying day in the festival calendar.
Demand from China is also set to rise as the country moves toward liberalizing
its gold market. China is the world's second-largest gold consumer, but as it is
also the world's biggest miner, much of its trade has historically been
domestic.
However, demand is so great that it can outstrip domestic output by 100 tons a
year.
Supply is limited. While miners are likely to try and raise output to capitalize
on rising prices, this will be slow.
Selling by central banks has tailed off sharply in recent years as gold's appeal
as a reserve asset increases, while scrap gold supply has failed to match the
peaks of early 2009.
INVESTMENT KEY
But while tight supply and a return of physical demand is set to add further
fuel to gold's rally, it is investment that will provide the real swing factor
for gold.
Funds favored the metal in the second quarter. Hedge fund Paulson & Co kept its
stake in the largest gold exchange-traded fund the SPDR Gold Trust, and now has
a 7.4 percent holding in the trust, while billionaire George Soros also held
onto the bulk of his stake while cutting exposure to equities.
"If you look at global asset allocation, the allocation into gold is still very
small, less than 1 percent," WGC's Ong said. "Given gold's recent strong
performance, there should be huge potential for (that) to rise."
That will largely be dependent on gold's performance against other asset classes
-- and that in turn will be reliant on the global economic climate.
"Since the whole financial crisis broke out..., gold's correlation with the
industrials is pretty much zero. It's now an anti-commodity," said Sean
Corrigan, chief investment strategist at Diapason Commodities Management.
"Do we continue to have worries on financial markets themselves like banking and
sovereign risk? Do we have the continued drum beat of disappointing economic
data? If that is the case, gold will do better than anything else."
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