Magic allure of gold, for some
The bulls and the bears are split on the prospects for gold as the price of the precious metal hit a high yesterday. On the one side, the bulls consider investment in the commodity as a hedge against the rising risk of a global recession.
In the other camp are the bears, who say piling into gold may be a sign of irrational exuberance. They point out that financial markets are giving conflicting signals. While low yields on bonds are signalling investors are worried about the threat of deflation, high demand for gold indicates concern about inflation risk.
"Gold [is] as good as Spam in forecasting prices," said Nouriel Roubini, the chairman of Roubini Global Economics, on Twitter this week. He appears sceptical about the gold rush.
Whatever their opinion, analysts say the outlook for gold hinges on the performance of the global economy.
"The outlook for the next 12 to 18 months is bullish but there's a higher danger of subsidence once the speculative froth eases," said Jeffrey Rhodes, the chief executive of INTL Commodities in Dubai.
Prices surged to US$1,826 yesterday, a rise of more than 20 per cent since the start of last month.
Investors have flocked to the commodity as concern about the US and European economies diminishes the attractiveness of the dollar and the euro. Historically, the precious metal has gained during bouts of economic or financial market turmoil as it is viewed as a hedge against risk. Prices surged during the global recession.
In Asia, demand for gold has been driven by a different factor: inflation. In China it hit a three-year high last month, and India's benchmark wholesale-price index has remained above 9 per cent for seven straight months. Renowned as a hedge against inflation, gold manages to retain its value over the long-term compared with other commodities.
As a result, Indian buying was up 17 per cent in the second quarter, with Chinese demand rising 16 per cent in the same period, according to figures released by the World Gold Council yesterday.
"Gold is stabilising in the near term," Ronald Leung, a physical dealer at Lee Cheong Gold Dealers in Hong Kong, was quoted as saying by Reuters yesterday. "But low interest rates in the US and the messy situation in Europe will push gold higher."
The US Federal Reserve pledged last week to keep interest rates low until 2013 to help support weakness in the economy.
Another driver of gold in recent years has been the introduction of exchange traded funds (ETFs). These enable a larger number of investors to buy gold bullion in the same way they would shares.
Purchases of gold in tonnage through ETFs reached an all-time high in recent weeks, helping support prices.
Published: August 19, 2011 04:00 AM