Gold resumes ascent as instability gives markets a wobble

Gold prices have hit a new record high on investor concerns that political turmoil may spread across the Middle East.

­London saw spot prices reach $1432.10 an ounce on Monday with the Comex seeing $1430.70 on Tuesday on fears that the United Kingdom and the United States were preparing to enforce a ‘No Fly’ zone in Libya, and increasing fears that the instability, which has toppled governments in Tunisia and Egypt could, could engulf Yemen, Bahrain, and unsettle other key regional oil producers.
The surge in gold price reflects increased investor interest in a hedge against both the possibility of an inflationary surge prompted by spiraling oil and commodity prices, as well as the possibility that it is a safe haven should the surge in oil prices trigger a global economic contraction.
Yuri Volov, metals and commodities analyst at the Bank of Moscow, says another key factor in gold’s resurgence after easing over recent months has been increased Chinese demand, coupled with increased readiness by global central banks to include gold in their reserves as a hedge against loose monetary policies in the United States, United Kingdom and Japan. 

“The demand from both investors and countries is increasing driving the increase in production output and prices.   Gold’s major implication is about its investment attractiveness due to growing value and less system dependence. China as well as other countries takes gold as the safest and valued instrument for government reserves hedging. Replenishment of reserves is associated with the need to diversify gold reserves and the volatility of currency exchange.”

Deutsche Bank AG Metals analyst, Erik Danemar says the changing attitude of central banks has underpinned the rise of gold over the last few years.
“Central banks globally have started buying gold from last year and will continue this strategy while Western banks will stop selling and emerging market banks such as Russia, India, Pakistan will become net buyers. These factors will definitely push prices up and offset a decrease in demand from the jewelry industry.”  

Gold skyrocketed by more than 30% over 2009-2010 on the back of economic instability, market volatility and the financial crisis. Concern about the debt issues facing European nations, and the possible implications for the Euro, has added to its investor appeal.
Deutsche Bank’s Erik Danemar, says that sets the scene for even higher prices.

“Our near term forecast is $1600/oz for this year and $2000 for next year, we are quite conscious about long term forecast. We will continue to see strong investments in exchange trading funds, and we believe in continued investments from institutional investors. Despite high appetites for gold, monetary stability still the main issue, people will be mulling to buy currency due to volatility and a lot of money has been printed to support the economy.”

Bank of Moscow’s Volov is also seeing further upside for gold but he notes that other precious metals including silver, platinum and palladium have also surged over the last year.  He also notes that the increased industrial use of these metals, when compared with gold, offers potential advantages if economic growth rebounds strongly.
“While silver and platinum have another application focused on industrial production and have less investment constitution than Gold, however, assuming growing PMI indices the production activity is rebounding with increasing demand on raw materials and commodities involved in the production, thus the prices can come at a high level.”

Volov adds that this year is also likely to see continued upwards pressure on the gold price.
“This year we have all chances to observe a renewal of historical gold price maximums. We forecast the gold price to reach the average of $1500 per once during 2011. Albeit, Central Bank monetary policy can bring its own issues to the market and investor expectations. Since tightening of the monetary policy and rising interest rates treasury securities will be more profitable in terms of revenue but more risky in terms of investing.  Another possible alternative to gold investments can be American Treasury securities and in terms of currency pairs – Swiss franc, but gold remains its wide spread accessibility for different types of investors.”