All That Glitters is Gold


Gold is king, going by the strength of its price, which was trading above US$1,200 an ounce after getting a boost from Barrick Gold Corp’s move to eliminate its hedge positions against declines in gold prices. Barrick is the world’s biggest gold producer.

The company had sold forward its gold and as such, did not benefit from any increase the gold price. Barrick said its positive view on the gold price prompted it to accelerate the elimination of these contracts ahead of schedule.

Gold has risen close to 40% this year amidst US dollar weakness, central bank buying and investor interest in a low interest rate environment. The greenback has fallen 8.7% against a basket of six major currencies, while the US Federal Reserve has kept the federal funds rate at close to zero since December 2008.

Given the gains gold has seen this year, is there more upside for the precious metal? Analysts are still bullish with UBS AG saying gold may reach US$1,300 next year while Standard Chartered Bank raised its price forecasts for 2010 and 2011.

David Barclay, commodity analyst at Standard Chartered, believes the momentum in gold prices will continue although he expects a correction in 1H2010 when the greenback gains in strength as risk aversion returns.

“Falling growth expectations and poor risk appetite – events like Dubai are a reminder that there are still many problems in the financial world – and a rebalancing of investor positions could provide a short-term rebound to the US dollar,” he explains.

In its Global Focus 2010 – The Year Ahead report, Standard Chartered says the investment case for gold has become increasingly compelling as a result of central bank buying and a structural increase in demand for gold as an investment at the retail level. The upside will be capped however by lower jewellery demand until consumers and investors adjust to hgher prices.

Periodic strength in the 1H will provide some headwinds but Standard Chartered expects gold to average US$1300 in 4Q2010 once the dollar resumes its weakening trend.

“US$1,300 is an average: it’s fair to say we could see prices at US$1,400 by year-end,” says Barclay.

Gold will remain on investors’ radar screen on the back of continued dollar weakness and as global and US interest rates remain low due to weaknesses in the US economy. “There won’t be any expectation of a near term rate hike; Barclay adds.

David Crichton-Watt, who manages the Phoenix Gold Fund at AIMS Asset Management Sdn Bhd, is convinced the gold price will continue rising for “quite a long time’: He says the gold price is now driven by the realisation that in trying to compensate for the bursting of the mortgage bubble, governments have created another bubble – the last in the series – the government bond bubble.

“The sharper minds in the investment community are already realising that this bubble, like all bubbles, will burst and, when it does, gold will be the only reliable asset left,” he explains.

This will lead to a clamouring for gold as those holding it will be unwilling to sell and those who are becoming concerned about the size of government indebtedness and ongoing budget deficits will want to hold gold but won’t be able to find sellers.

“They are therefore bidding up prices. I think the levels at which gold will move from the hands of those who have it to those who want it can only happen at much higher prices,” Crichton-Watt says.

“I am sorry to say that the future of fiat currencies has never looked worse than it does now and that is why a lot of money is trying to move into gold. It will keep trying to do so at ever higher prices,” he adds.

Crichton-Watt refrains from forecasting the price of gold saying that it is a fool’s errand as the supply of gold will change very little but what will change is the quantity of money available to be exchanged for it and people’s confidence in their government’s promises.

Crichton-Watt himself has had virtually all his savings in gold for years as he has no confidence in the economic management skills of Western governments. Quoting Rousseau who said, “All fiat currencies will eventually fall to their intrinsic value – which is zero”, Crichton-Watt says he fears the world is heading in that direction again.

“But I have no way of knowing how quickly we will get there,” he says.

Meanwhile, the smart money is moving into gold. Hedge Fund manager and billionaire John Paulson is launching a gold fund, investing in gold miners and other bullion-related investments.

It has been reported that John ‘Ihdor-Jones, founder of ndor Investment Corp, has turned into a gold bug, with his firm taking positions in gold and other preious metals in recent months.

Source : The Edge

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