Gold could easily hit the $1,600-per-ounce (Dh5,880) mark in the coming quarters as current market fundamentals continue to support the precious metal’s reputation as a safe-haven asset, according to a commodity analyst at Danish investment firm Saxo Bank.
While gold may have been under pressure the past week due to the
strengthening US dollar, Ole Hansen, senior manager-Trading Advisory Team at
Saxo Bank, says the bullion has historically proven itself capable of holding up relatively well under stress.
“The factors that have been supporting gold over the past couple of years are still very much present now. We have central banks that for the past 20 years been selling gold on an annual basis and last year this [trend] turned positive especially with emerging economies like China, India, Bangladesh and Russia starting to buy gold in order to diversify their currency reserves,” he said.
The United States’ relaxed monetary policy also saw interest rates steadily declining, offering very little incentive for investors to park their money in US bonds, says Hansen.
“Right now we have a situation where yields in US [bonds] are negative. If you invest anywhere between short-term up to almost 10 years, you will have negative returns because the inflation is high. Again, non-interest-bearing assets like gold and silver are not disfavoured in this situation because the alternative is not giving you a pickup,” he said.
Likewise, the turbulent economic climate in the Eurozone and the political crisis in the Middle East and North Africa (Mena) are contributing to the precious metals’ popularity as an investment tool.
Asked if the gold could break the $1,600 mark this year, Hansen said “easily” because the metal has managed to gain momentum. Early this month, gold traded above $1,540 per ounce, which he said was the target rate for the second quarter. On Thursday, early trading in gold was at $1,524 an ounce as the dollar becomes bullish.
“We haven’t seen any major shift in investor sentiment apart from
George Soros last month when he closed his position on the bullion, but it’s obviously worth keeping an eye on what the large investors are doing because they are more forward looking. The dollar is worth keeping an eye on as well, but yes, there is a chance we can see even higher [gold] prices this year,” Hansen told Alrroya.com.
Possible ‘gold bubble’ brewing
Gold has undoubtedly managed to ride the wave of the recent global financial storm and continues to perform well given the current market conditions. But there are also indications that the bullion may be a victim of its own success, the Saxo Bank analyst commented.
“The risk [is] actually the success itself. We have seen quite a dramatic rise in demand even from private investors over the past five-six years because of new inventions like the exchange-traded products, which made [gold] available to everyone basically,” Hansen said.
Also, a strong dollar would likely put pressure on dollar-priced commodities such as gold and silver.
At the moment, though, the yellow metal has been gaining strong support from emerging economies such as China, which according to the
World Gold Council (WGC), displays an insatiable appetite for gold.
Chinese consumption of the precious metal has been growing by an average 14 per cent annually with demand in 2010 reaching above 700 tonnes, the WGC report said. The council also predicted that China’s gold demand will double in the next 10 years, but added that this projection may be realised within a shorter time frame considering the country’s voracious consumption trend.
Hansen said that several domestic concerns such as high inflation, underperforming stock market, a potential bubble in the property sector and a relatively closed market have prompted China to be positive on gold.
“Because the [Chinese] market is not as open as it is in other parts of the world, [investors] can’t buy foreign shares or foreign bonds. But gold is available to them, which results to quite a big pickup in demand,” he said.
Silver prices still volatile
Silver grabbed the headlines in April after hitting an all-time high of nearly $50 an ounce, but Saxo Bank’s Hansen said he remains a bit reluctant about the industrial metal.
“I think historically it’s fairly expensive right now. Just a year ago, it cost 70 ounces of silver to buy an ounce of gold. This is now down to 40-42 [ounces of silver per ounce of gold] and even reached a low of 30 ounces before the collapse of silver back in May,” he explained.
Hansen also mentioned that while silver’s big swings may be attractive to short-term speculators, it does not prove favourable to long-term investors.
“During May we saw daily price ranges of 10 per cent on silver. From an investment point of view, that’s not good news because it makes it difficult to get in and hold on to [the investment]. Whereas gold is much more stable, the daily ranges are much smaller so [it is easier] to manage,” he said.
Your comments