Despite the economic and geopolitical turbulence that rocked most of 2011, gold emerged as one of few asset classes that managed to ride out the storm with year-end prices soaring by nine per cent from 2010, the World Gold Council (WGC) reported.
“True to its role as a vehicle for diversification and risk management, gold outperformed a large majority of assets, including oil, on a risk-adjusted basis during a year of marked uncertainty and increased volatility,” the
gold council said in a commentary published on January 23.
Gold prices in US dollar terms jumped by a significant nine per cent to close 2011 at $1,513 (Dh5,560) per ounce compared with the same period a year before. It was also last year when the precious metal reached a new peak of $1,895 as risk-averse investors boost gold’s safe-haven appeal.
WGC figures likewise noted that gold’s price appreciation was higher in currencies other than the greenback. Gold’s year-end prices in British pound terms were also nine-per-cent higher at £994.22 (Dh5,687) an ounce from 2010, but was significantly stronger by 11.6 per cent in euro terms at €1,182.97 (Dh5,655) as the single currency took a beating from the Eurozone’s sovereign debt crisis.
Gold made the most dramatic increase in key emerging markets such as India, South Africa and Turkey where prices in local currencies hiked by 29 per cent, 34 per cent and 34.4 per cent, respectively, as these countries’ monies suffered heavy devaluation.
While the yellow metal has proven to be buoyant throughout last year, its market performance was undoubtedly influenced by the many incidents that shaped 2011 such as the Arab Spring that toppled long-term administrations in Tunisia, Egypt and Libya; the Japanese earthquake-tsunami disaster that also crippled the country’s nuclear industry; the United States’ debt situation that prompted credit agency Standard and Poor’s to downgrade its AAA rating; and Europe’s sovereign debt crisis that until now threatens the existence of the single-currency zone, according to the gold council.
During this time, gold’s investment reputation remained on the spotlight and the bullion lured investors seeking a safer place where they could park they money. WGC also mentioned that central banks’ gold-buying activity in 2011 likely reached another high as governments continue to diversify their economy.
After reaching peak, gold’s momentum faltered
Towards the latter part of 2011 despite its safe-haven appeal, gold experienced some market pressures. With the Eurozone debt crisis persistently sending jitters across the global financial market and the US economy refusing to get off the ground, economies of emerging bigwigs such as India and China have also been threatened.
As a result, many investors have opted to hold onto their cash and reduce their exposure to equities and commodities.
“In turn, gold prices retreated, falling to the $1,600/oz level, in part due to a stronger US dollar and, in part, due to being one of the few liquid assets with positive returns which investors could use to cover some of their losses,” the WGC report mentioned.
Another factor that added pressure to gold prices is the strong profit-taking among investors during the fourth quarter of last year.
“Additionally, as a higher number of clearing houses, exchanges and banks included gold in the assets accepted as collateral, gold gained in prominence as an integral part of the financial and monetary system. Faced with margin calls on other positions, some investors sold gold to finance these calls, thereby putting further pressure on the price,” the council explained.
Chinese New Year to ease gold market in January
Progress, albeit relatively slow, in the Eurozone debt crisis negotiations have offered renewed hopes for global equities. Ole Hansen, Senior Commodity Strategist at
Saxo Bank, noted in the bank’s weekly commodity update that the stock market rally has sapped gold of some of its allure as an alternative investment
“After a $160 move up from the December low, gold paused for breath this week, rising by less than what the dollar dropped… The Chinese market will effectively be shut for the next couple of weeks in celebration of Lunar New Year so trading will cease and demand should ease,” he said.
On Tuesday, some analysts said gold would likely ease first before it could break the $1,700-per-ounce mark in the medium-term, considering the uncertainty that still surrounds the euro debt talks. Spot gold traded at around $1,670 on Tuesday morning.
Saxo Bank’s Hansen said they “suspect gold could be in for a bumpy ride over the coming week, given the potential for the dollar to strengthen again after its recent correction.”
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