Gold so far is surviving what appears to be the most hostile economic environment the world has ever experienced in recent history. The precious metal’s safe-haven appeal continues to shine amid political and financial tensions.
But the world’s best performing commodity could face a challenging year ahead as tough market conditions put pressure on prices, according to analysts.
In September 2011, gold broke its all-time record after it traded near the $1,900-per-ounce mark, helped in part by the European debt crisis. However the bullion’s safe-haven status was tested in the third quarter of 2011 when prices dipped to around $1,500 despite ongoing problems in the Eurozone.
Gaurav Kashyap, Head of the
Dubai Gold & Commodities Exchange (DGCX) desk at
Alpari ME DMCC, said the incident was a particularly curious phenomenon.
“Usually gold is seen as a safe haven in such times, but we [saw] the opposite taking place. The take away of this is perhaps [because] a lot of investors in gold are sidelined and waiting for more meaty developments to emerge out of Europe,” he said.
Kashyap further explained that while top European officials have met and discussed the region’s debt problems, the efforts did not offer much inspiration to calm investors’ fears.
“The markets are looking for a clear and concrete solution [to the debt crisis]. And that’s perhaps why we haven’t seen a breakout as yet. 2012 is going to be another event-filled year and we can expect gold prices to remain volatile [throughout the year],” he added.
Kashyap likewise believes that the developing EU sovereign debt crisis will continue to underpin risk sentiment, which should act to the gold’s advantage.
Gerhard Schubert, Head of Precious Metals at
Emirates NBD, is also optimistic about gold’s performance this year.
“We expect gold to reach and overcome the
$2,000 [per ounce] level during the first half of 2012,” he said as the appetite for gold remains unabated especially in the Middle East.
Mideast’s gold affinity to boost investment potential
Despite the absence of final figures for 2011, Emirates NBD’s Schubert anticipates that the number of gold traded in the UAE during the year would reach around 711.2 tonnes, while gold consumption could be around 81.3 tonnes.
“These numbers demonstrate the affinity towards gold in the region and also the confidence of the world in choosing the UAE as the hub for physical metal distribution,” Schubert said in an e-mailed response to Alrroya Aleqtissadiya.
Analysts attribute the gold’s growing popularity in the Middle East to its direct association with jewellery making, as well as the gold’s inherent quality as a safe investment that can easily be liquidated when needed.
Al Workman, Vice President of
Watts, Griffis and McOuat Ltd, an independent Canadian firm composed of geological and mining consultants, said gold has been a popular store of wealth in the Middle East where there is an inherent distrust of fiat currency.
Investors in the region tend to be more cautious in their investment approach, often preferring tangible long-term assets.
“This philosophy has served the region well, and I believe that gold will continue to play a major role both for investment and for purposes of banking wealth,” Workman said.
Price fluctuations to impact gold in the medium, long term
While gold has proven itself to be a reliable investment vehicle, its performance will be influenced by various factors – the most significant of which is the US dollar. As the dollar gets stronger, prices of dollar-oriented assets such as gold generally remain suppressed.
“The major challenge for gold is how to react in an environment which is led by a stronger outlook for the US dollar,” Emirates NBD’s Schubert commented, indicating that the traditional inverse relationship between gold and the US dollar will fade into the background against the strong macro issues to be resolved in 2012.
Alpari ME DMCC’s Kashyap said that like any other commodity, gold trend is dictated by supply and demand, which is why any news that a central bank is buying and converting some of their holdings into bullion will see sharp upticks in the price of gold.
“Market sentiments will obviously be a key factor in the future of gold prices and we will be keeping a close eye on the performance of the US dollar index [as well],” Kashyap added.
Analysts believe that the recent strong price fluctuations and rise in volatility will have an impact within the investment community over the medium to longer term.
“Gold is acting as an asset class and it rightly does so in this low-yielding interest environment,” Schubert said, adding that future investments in gold will be primarily made if the reasons for investments are still valid.
In recent years, the metal has been posting double-digit growth rate. In 2009, its value was up 24 per cent from 2008; in 2010 it was more bullish at 30 per cent and while 2011 was challenging, it still managed to post a 10 per cent hike. Kashyap said this exhibition of gold’s resilience has certainly made it a “good long-term prospect”.
Workman of Watts, Griffis and McOuat Ltd, said he still has faith in the precious metal.
“I see gold as an alternative investment vehicle, [although] timing the market is important. My preference is for common shares in gold companies, both explorers and producers. I believe that volatility will pervade the market in response to inflation concerns and concerns about an economic catastrophe beginning in Europe,” he said.
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