• Home
• /
• Business

Speculation over, stay safe with yellow metal

DUBAI — Gold will not lose its lustre anytime soon as the world recovers from a downturn and moves from an era of speculation to wealth preservation and consolidation. Prices have reached record levels, up 11 per cent this quarter, and are set to rise further, according to the World Gold Council.

Only last week, Brian Belski, Oppenheimer & Co.’s chief investment strategist had said gold is “way out of whack with commodity prices” and is headed for a slide as it did during the eighties

“Momentum and misguided fear appear to be behind gold’s rise,” Belski said. “Therefore, we do not expect the gold trade to end well.”

After taking inflation into account, the metal is more costly than at any other time since the early 1980s. Spot gold tumbled 48 per cent between 1981 and 1984. A similarly “sharp and severe” drop is likely to follow the current rally, the report said.

Gold for immediate delivery traded at $1,241.82 an ounce in the morning in London ion Wednesday and western markets are expected to shore up gold prices during the rest of the year.

Speaking to Khaleej Times, Ajay Mitra, MD Middle East and India at the World Gold Council, said: “While WGC does not speculate on gold prices, investor flows, more specifically from western markets, will provide a key means of support to the gold price during the rest of 2010 as investors seek to diversify their exposures to other assets and protect their wealth against high and rising debt levels in Western economies.’’

The gold body expects demand for jewellery to rise and recover, with Asian economic honchos India and China leading the charge. Saudi Arabia, Turkey and the UAE are also seen as growth markets for the yellow metal.

An estimated 62 per cent of demand is for gold jewellery. The recovery curve will continue after sales reach 470.7 tonnes in the first quarter of the year in the non-Western countries.

“Economic recovery in Europe and the US will add to this demand, as a potential return to restocking in the jewellery sector is likely, given that existing inventories have been run down since the first half of 2009 to very lean levels. This should provide fundamental support to the gold price,” said Mitra.

This optimism stems from the fact that the precious metal is now being considered the “ultimate hard currency and the preserver of wealth” during the financial shakeout.

“Against the backdrop of turmoil in the worldwide financial markets, the unique role of gold as the ultimate hard currency and preserver of wealth has come into focus, a role which is supported by the fundamentals of rising demand, constrained mine production and a shift in behaviour by central banks becoming net buyers of gold. Investors in the aftermath of the credit crunch are also switching to a strategy of wealth preservation rather than speculation. Within this context, gold’s diversification qualities and its ability to mitigate macro risks has led to renewed strength in investment demand across the board for gold, in particular for physical gold ETFs and for gold bars and coins in the Eurozone, especially in Germany.”

In October 2009, the Reserve Bank of India had bought 200 tonnes of the yellow metal from the International Monetary Fund in the biggest single purchase in 30 years. The deal was worth $7.5 billion and was made with an eye on financial security in these tumultous times.

“This is a sea change in the gold market on the central bank front, the whole equation has changed from central banks over a decade or two — you’re counting them as sellers, and now we’re starting say maybe central banks are going to be buyers,” commented the author of ‘Ages of Gold’, Timothy Green.

The Indian purchase surprised traders, who had expected China, the biggest bullion buyer since 2003, to pull it off to add to its $2.5 trillion worth of reserves.

For the record, the US still has the largest gold reserves at 8,000 tonnes, while India has a modest 550 tonnes of the gleaming metal in stock and comes ninth on the list.

This trend by central banks to beef up their golden defences against uncertainty, is seen by analysts as a good sign for the future of the precious metal.

That brings us to the moral of the story: you may not strike gold in rocky times, so buy and hoard it for a rainy day. — allan@khaleejtimes.com