Date : 19/01/2010
Author: Markaz Analyst Club
Or will economic recovery in the US and a strengthening Dollar lead to Gold falling out of favor with investors?
Gold has traditionally been used as a hedging device against a weakening US Dollar, low interest rates and inflationary fears. These conditions prevailed in 2009, leading Gold to reach a record high of USD1,227.50. Additionally, the Reserve Bank of India announced a purchase of 200 ton of Bullion from the IMF, a symbol to the lack of confidence in the greenback. Gold, which typically moves inversely to the dollar, rose 24% last year as the dollar fell 4.2%. Analysts predict that the price may reach another all-time high this year. Analysts surveyed by the London Bullion Market Association said that in 2010, gold will average USD1,199, up 23% from last year, according to the average forecast in a survey of 26 traders and analysts.
As global economic and market conditions continued to be murky and unstable, Gold saw a spectacular rise in popularity, gaining 10% in November alone to close out the year with a 24% annual gain versus 6% for 2008. According to Mr. Raghu Mandagolathur, Head of Research, the sharp rise in gold indicates the cloudy global status in terms of pulling out of recession. In spite of huge fiscal and monetary stimuli being enacted so far, the world is still a place with significant imbalances. Such scenarios lead to a favoring of Gold and other commodities as stores of value or “safe havens” which leads to a direct increase in demand. “The demand side factor is further compounded by aggressive buying by some central banks (e.g. India). On the other hand, supply is constrained. It is estimated that new supply will significantly reduce from 2010 onwards. Recycling from scrap as well as government sales are expected to be muted thus constraining supply further. Strong demand and weak supply is further helped by low interest rates, which are a plus for any commodity investment.” (Mr. Raghu Mandagolathur)
However, gold is not an asset class. Prices will tend to come back the moment there is clarity on the global economy. Till then the gold price may sway due to intense speculation. (Mr. Raghu Mandagolathur) Gold is likely to see another year of gains in 2010, but not as “spectacular” as 2009, according to Mr. Roshan Chutkey, who tracks international markets. He cites “considerable uncertainty surrounding USD movement for the year” in addition to a “general consensus that the greenback is in for a long-term depreciation” as propellers of Gold prices gains in the coming year. “Gold has averaged USD950 for 2009 with the current prices hovering around USD1,150; I expect gold to swing between USD1000 and USD1300 for 2010.” (Mr. Raghu Mandagolathur)
- Compiled and edited by Ms. Layla Al-Ammar, Investment Analyst, Research
The Markaz Analysts Club is an initiative launched by Markaz with an aim to collate the many varied and diverse viewpoints of Markaz analysts in an informal setting in order to share with the public the depth and breadth of analyst knowledge power within Markaz. On a periodical basis, a question concerning the topic/s of the day is posed to our analysts spanning various departments within Markaz (from Real Estate to Oil & Gas to Corporate Finance etc); these analysts’ responses are then compiled into a brief opinion piece for public viewing.
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