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21 Apr, 2009 13:52

Waning bear market rally sees waxing gold regain some lustre

This weeks equities sell off has been accompanied by higher gold prices. Strong bank earnings in the U.S. had seen it lose a little lustre during the March rally, but investors seeking safety are flocking to it again

Several US banks have posted record results for 1Q 2009 leading to hopes that the worst of the global financial crisis, and accompanying economic downturn, was behind us.  Throughout March that saw equities and some commodities rally more than 20% of their lows, and enabled optimists to wonder if the worst was past.

The gold price has moved inversely to market sentiment, hitting a high of just over $1000/oz when the markets were hitting lows in late February, and easing back towards the $870/oz mark late last week.

But the costs involved in bailing out the global banking system – with central banks running out of room to move on interest rates, and in some cases printing money  – are prompting renewed longer term inflationary fears. Michael Kavanagh, Head of Equity Research at Uralsib says this and the prospect of yet more liquidity being needed is putting a limit on how far gold can fall.

“People are questioning the global economy again, questioning the recovery and, of course, asking the question if there will be a need for additional liquidity, in order to try and get us out of this mess that we’re in. And when the Fed is printing money, when central banks around the world are printing money than the value of hard asset goes up. And one of those assets is gold. Gold is obviously perceived as a safe haven asset, and when people are nervous they run to gold.”

Questions about liquidity are getting louder ahead of the results of the ‘stress tests’ being undertaken on U.S. banks. Bank of America, which earned more in 1Q 2009 than it did for the whole of 2008, saw its share price hit when it issued a bleak warning about the rest of the year, while increasing provisions for bad loans. Gold, which has moved inversely to the recent buoyancy on equities markets, gained renewed traction.

Peter Hambro, Executive Chairman of Russia’s second largest gold miner, Peter Hambro Mining, believes further rises in the gold price are likely.

“I think you could see the price for this year of $1000 per ounce. The first quarter was $900 and a bit, its now $860. I still think that as we go through the year we will see a higher price, and we will see a higher price in the following year.”

Another factor underpinning the price has been currency movements. Late last year saw gold moving higher with the U.S. dollar – an almost unknown occurrence. But with increasing concern about the long term value of the Greenback – despite its recent resilience – and ongoing worries about currencies worldwide, any drift away from the U.S currency is likely to leave the gold shining brighter than ever.  And with this week seeing it move back towards $900/oz, gold bugs are looking for the next push on $1000.