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Gold, once a measure of wealth of the great empires, has emerged as a financial hedge for all and sundry in troubled times against the beleaguered dollar and wobbling global financial markets.
The yellow metal has been in the headlines for the past few months, with prices far surpassing the previous peak of $850 in January 1980.
This year gold has smashed through the $1,000 level, in fact topping $1,030 last week amid turmoil on international financial markets.
Within the past week, it has plummeted back towards $900, in a dramatic display of volatility, reflecting just how turbulent global credit conditions have become.
"Bullion may average $870 an ounce in 2008," the Australian Bureau of Agricultural and Resource Economics said in its recent quarterly report. "Global financial market uncertainty, largely as a result of the deterioration of the US subprime mortgage market, is expected to continue,'' said the Canberra-based bureau. "Gold is expected to reciprocate in prices."
Most economists and analysts had been expecting the Fed to continue lowering interest rates because of fears that the economy was on the verge of recession. That evidence has grown, so that now there is little doubt of that fact.
Yet gold is not favoured by recession. Its motivator is inflation, which has become evident globally in other commodity prices, such as industrial metals and food. Dropping interest rates to try to counteract recession does not help restrict inflation, which appears strong enough for fundamental reasons to resist the drag of weak economic growth.
Significant component
These are 'stagflationary' times. Against a backdrop of low interest rates, but with inflation eating into the purchasing power of cash, gold regains its historic appeal as a store of value. Speculators then get into the act to exaggerate its movements.
Merrill Lynch wrote in a recent report that it expects gold to average $925 per ounce this year and $1,000 per ounce in 2009. "Due to higher forecasts for the 2008-2012 period, our 10-year average gold price has jumped from $655 to $800 per ounce," they said.
Barclays Wealth has forecast gold to average above $850 this year. "We think the upside surprise in both inflationary pressures and volatility [in other assets] is likely to lead investors to favour gold for this year," said Paul Singer, an analyst.
Economists and global investment strategists visiting Dubai recently told that gold will remain a significant component of investment portfolios around the world.
Gold is now considered as a portfolio diversifier more than ever. In the context of a severely weakened dollar, many central banks institutional investors and sovereign wealth funds around the world have been buying.
"Commodities will have a strong investment case in the year ahead because of strong Asian growth, weakening demand for US Treasuries and strong prospects of oil. Gold in particular has a strong case because of the asset diversification by emerging market investors," said Stephen Jen, chief currency strategist with Morgan Stanley.
An important distinction between commodities and equities is that, unlike stocks, the price of commodities can never go down to zero.
An interesting example would be the share prices of Enron, which collapsed from $95 to less than $1 when the company filed for bank-ruptcy in December 2001.
Production slips
Historically, commodities have never experienced such a massive decline. On the flip side, commodities can soar. Gold's rise to $850 in 1980 was from a level of $240 in just ten months.
While the reasons for demand have become obvious, the surge in gold prices, even to above $1,000 per ounce, might not make any significant difference to supply.
Global gold production has slipped by six per cent since 2001, and current record prices are not expected to reverse the eroding trend in the next several years.
Merrill Lynch analysts have said that there could be a marginal increase in supply which will not have any major impact on prices.
"Looking ahead, we expect global mine production to be effectively stable in 2008, chiefly as a result of lower than anticipated supply from new mines and lower grades at maturing operations," they wrote.
According to analysts, even when new deposits emerge, they may not be developed, for a variety of reasons, including shortages of skilled labour and infrastructure, high capital costs, legal restrictions in emerging market countries and long-term price assumptions.
Before committing to expensive projects that may be producing for decades, mining firms must feel that the prices used to judge viability will be sustained.
Your comments
We should find other alternative for gold. Middle class people are suffering due the huge increase in gold prices.
From Suhail Ismail
Dubai
India
Posted: March 24, 2008, 14:27
The price should be below Dh50 per one gram, otherwise business will be down.
Majeed
Abu Dhabi,UAE
Posted: March 24, 2008, 08:31
It seems from my point of view the price might reach $1000 or more before the end of this year, since the investors are heading towards gold more than property or dollars.
From Hayder
Dubai
UAE
Posted: March 24, 2008, 08:06
Of interest during this boom is that many of the juniors have not really performed as in previous gold booms. This, however, provides a cheaper entry to them as and when they make new discoveries, or kick-start old long-forgotten discoveries. The upside potential of these types of situations is enormous.
From BSM
Melbourne
Australia
Posted: March 24, 2008, 05:27
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