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Gold to surge back in 2009

I-Net Bridge | Wed, 24 Dec 2008 13:23

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[miningmx.com] -- THE gold price is likely to end 2008 roughly where it started at close to $850 an ounce, which is deceptive given the bumpy ride the precious yellow metal has taken as it charted the troubled waters of the past year.

Gold has been dragged below the waves by the crash of the commodities supercycle, and hijacked by the sell-off in equities as jittery investors fled the market, but the precious yellow metal has emerged at the other end with a brighter future than some of its sister metals.

Starting the year at $846.75 an ounce, gold rallied to a high of $1,011.25 an ounce in March before pulling back to the $840 to $849 range it was trading on Tuesday afternoon.

The price, while gaining nearly $160 between the early September and early October, became one of the casualties of market panic as investors switched out of equities and bullion in exchange for cash to cover margin calls and losses on other investments as the markets turned sour.

Despite this, and as testament to the precious metal's wherewithal, gold recently traded at parity to platinum for the first time in 12 years.

Once the darling of the metals industry, platinum has lost roughly 45% of its value, having started the year at $1,541 an ounce, and at $850.50 an ounce earlier this week, was still only $7 more per ounce than gold.

Having retained its lustre, gold was an investment bright spot this year, said PricewaterhouseCoopers (PwC) earlier this month.

Releasing its annual survey of 45 gold producers, PWC said gold has held its value in 2008 while other investments have slipped dramatically.

"While other commodities and the economy have trended down, gold has held its value. Gold is serving its purpose as a hedge of wealth in uncertain times," said Paul Murphy, leader of PwC's Canadian mining practice.

This was echoed by Euro Pacific Capital president and chief global strategist Peter Schiff, who said during an interview with the Wall Street Transcript that if you look at the price of gold relative to its peak, it is only off about 25%, whereas if you look at stock markets around the world, most are off 50% or more.

"If you look at how gold has held up relative to industrial metals, relative to energy, relative to agriculture, gold has done extremely well. I think the fact that it has gone down in dollars has caused a lot of people to assume that gold is not performing in this correction, whereas, in fact, it has," said Schiff.

Also if you look at gold in terms of other currencies, recently there have been all-time record highs set in the price of gold in South African rand, in Australian dollars and in Canadian dollars.

"So gold has actually had a very strong, stealth move when viewed from the prism of something other than the US dollar," Schiff said.

Advocates of gold also stress that the precious metal is one of the best hedges against inflation.

Inflation

While the global economy is arguably in a deflationary environment, most economists believe that with all the government spending to prop up the global economy, inflationary pressures may soon take over.

"Given the world's response to the financial crisis, we expect the spectre of inflation should reassert itself in the medium to longer term, and gold to be driven by this not so much in 2009 as in 2010," Macquarie First South Securities said in a recent note to investors.

It also noted that gold has the ability to outperform during deflation, as it did during the Great Depression in the 1930s.

This it said was essentially due to gold's hybrid behaviour as a commodity and as a currency. In deflationary times investors are more likely to hoard currency than invest it, because the value of any investment during a deflationary spiral is likely to decline.

"To the extent that gold fulfils some role as money, it is to be hoarded along with currency," Macquarie said.

On the price side, UBS Investment Research has predicted that gold may well plunge to $300 an ounce in 2009 while Commerzbank has suggested that gold prices could double in the next three to five years.

$1,200 for gold?

Gnanasekar Thiagarajan, director at Mumbai-based Commtrendz Risk Management Services, suggests gold may move closer to the $1,200 an ounce mark.

He said in his 2009 outlook for gold that despite the recent coordinated measures across the world to calm the markets, the global liquidity crisis is nowhere near its end.

"Moreover, with higher gold lease rates, gold is even trading in parity with money-market rates and increasing its appeal relative to holding cash.

This all suggests that flight-to-safety will still be the main driver of gold prices for some months to come," said Thiagarajan.

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Gold is expected to develop a stronger trading link to the currency world as risk premiums on money stabilise.

Then, he said, as the US fiscal and trade deficits get unmanageable, the weaker dollar could help gold break through $1,200 an ounce.

As Thiagarajan suggests, the beauty of gold is the fact that the price reflects many macro variables at once.

Three variables – risk, currency and commodity prices – by themselves go some way towards explaining the fluctuations in the gold price.

"Gold is sometimes a currency, sometimes a commodity and sometimes a store of value," he explained.

But the official collapse of the global economy following the credit crisis has meant gold has been forced to reflect these three variables simultaneously, coaxing the precious yellow metal out of its mould and into a new era where it is no longer narrowly regarded as a simple barometer for rising risk premiums.

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