Silver lining for gold market

The price of gold may have dipped from its recent record high but there are a number of positive signs for investors in the precious metal, according to a local expert.

Tuesday, April 24th 2012, 6:39AM 2 Comments

by Niko Kloeten

Gold is currently trading at about US$1640, up 9% year on year but down 15% from its record high of $US1920 achieved in September and November last year.

New Zealand Mint's Mike O'Kane said despite new confidence about improving global economies, gold remained popular across the three major markets (US, Europe and the BRICs-Brazil, Russia, India and China).

Referring to the US, he said, "While the market and economy remain muddled, and talk of recovery is tempered with results that show otherwise, pricing will remain underwhelming and volatile.

Speculation is rife whether QE3 (the third round of quantitative easing) is on or off, with current attitudes changing "as regularly as socks", O'Kane said.

"The past few years have seen strong growth in US$-denominated gold as investors anticipate inflation due to Fed's tactic of "kick-starting" the economy by printing money. That's generally considered positive for the long term outlook for gold."

In Europe, issues remain around potentially defaulting nations such as Portugal, Italy, Ireland, Greece and Spain continue to haunt markets and underpin gold's safe haven status, he said.

"Fundamentally, confidence is weakening in the ability of these nations to lower deficits and become financially stable over the medium term. That leads to a weaker Euro against the US Dollar," O'Kane said.

"The alternative currency in this mix is gold and it appreciates as investors move away from the troubled currencies. However the trend is tempered by an appreciating US dollar which makes the Greenback more attractive to many investors and weakening demand for gold.

"The upshot of all this is that both currency and gold markets are pretty volatile."

He said the BRIC nations are a bright spot with the strengthening of their economies causing an increase in demand for gold to the point where these countries can now have a significant effect on the gold price.

This was evidenced by the recent strike by Indian jewellers in response to a tariff hike, which caused gold to drop in price; although the strike is over the tariff remains.

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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Comments from our readers

On 24 April 2012 at 4:49 pm John Berry said:

I could understand the rush to buy Gold in 2008/9 when investment banks were failing and there was a real risk of complete failure of the global financial system. I am struggling to be a strong supporter of Gold now. Only 11% of demand is "real" (industrial, dentistry) - the remaining 89% is entirely sentiment driven (investment, jewellery). Gold doesn't always live up to its safe haven status - equities and precious metals often fall in tandem at the moment. Unless you really believe "it is different this time" (currency debasement will soon lead to hyperinflation and the demise of paper currencies), I would approach Gold with caution. It may be a while away, but any hint of rising US rates (when the opportunity cost of holding gold becomes very clear) could see a rush to the exit..... and don't forget to consider the currency implications of buying unhedged gold....

On 24 April 2012 at 6:07 pm Stephen Rogers said:

Hi John, Didn't you tell me gold was a bubble two years ago, when it was around US$1250?
Reasons for Gold ownership today are as strong as they have been for the last 1000 years.
The fact that gold is non-correlated with just about every other asset is ideal for moderate inclusion in a balanced portfolio.
As for rising US Interest rates, i think Mr Bernanke, isn't to keen on that idea, along with the politicians in Spain Portugal, Ireland, Italy and France who dread the involvement of the bond vigilantes, in trying to keep them honest.