Donna Block
If miners and a few metals analysts are to be believed, gold is golden once more. They say the precious metal, up from 19-year lows, is poised for a major comeback. But the glitter might not be as bright as those who dig it out of the ground are hoping.
Metal markets are still trying to figure out the financial debacles’ effect on world investment and demand. “Gold prices have bounced from their lows, but there are still concerns about how demand may hold up in a slowing world economy and concerns about the potential for further central bank supply,” said James Steel of New York commodity broker Refco.
Traditionally gold has been regarded as a safe haven; an alternative to paper money in times of war, economic uncertainty and inflation. But that no longer appears to be the case.
While the World Gold Council, an industrial think-tank and pseudo- marketing body, points out that the demand for gold jewelry is at an all- time high, people in Asia, Eastern Europe and Latin America have not turned to the metal for financial security. American bonds, not gold, have become the world’s favourite hedge and financial storm shelter of choice.
“We cannot expect much from gold,” says Mike Schussler of Future Bank Corporation. “The rise in price has more to do with the weakening dollar than a true bull-run in gold.”
However, Nick Goodwin of Fedsure Asset Management feels that the tide has turned for the yellow metal. “Gold is the only asset that owes no one any debt. In these uncertain times investors may want to get back into it.”
Maybe, but traders and investors say the upturn in the prices of gold bullion, platinum, silver and even copper, has more to do with investors taking profits and closing out their short positions. A weakening dollar is also responsible for the gold price surge.
The notion that the United States economy would be unaffected by the global market meltdown was wishful thinking. With slow growth threatening the US, there is a real possibility of lower interest rates sooner rather than later, thus a weaker dollar and stronger overseas currencies.
Gold boosters see the recovery in the yen and the Australian dollar in the past few days as a sign that Asian demand for gold may be on the rise. But “the implications of a further economic slowdown and a delayed recovery in Asia are serious for gold”, said Kevin Crisp, a vice-president with investment bank JP Morgan.
“Emerging markets dominate global gold demand, with a 65%share in 1997,” Crisp said. “Expectations of a weaker world economy will delay the resumption in gold demand from South-East Asia and raises the risk of contagion spreading to north Asia and India. India and China together account for 26% of global gold demand and contagion in these markets would seriously undermine the gold market”.
Not only has the precious metal taken a beating from Asia but European Union nations plan to trim their holdings ahead of the launch of the euro by selling the bulk of their reserves on the open market. An even bigger threat to gold and commodity prices is Russia. There’s a possibility that the country will sell off its gold and oil reserves and this will send commodity prices tumbling.
“The market is awash with metal right now and it will take a breather before there is any real direction” says one South African metals analyst. Most analysts agree that gold could trade between $280 and $315 an ounce for some time and may even hit new lows before it makes a run.
On the other hand, gold shares should outperform bullion. There is still huge volatility in share markets, but gold companies are doing well. The big producers have benefited from the weaker rand and their operations are in good financial health.
If you stick close, watch carefully and are prepared to trade the shares, the rewards could be handsome.