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Gold's last hurrah?

Allan Seccombe | Wed, 07 Oct 2009 10:13
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[] -- THE small interest rate hike in Australia is an indication that the worst may be over for the global economy, but it holds a downside for the gold price, said Wayne McCurrie from RMB Asset Management.

“There doesn’t look to be any inflation in the world at the moment, in fact the biggest scare is deflation,” McCurrie said on the World at Six, a week-nightly radio business show.

“Gold managed to go up a couple of hundred dollars after worst financial crisis in 70-80 years. If gold was truly a hedge against financial meltdown and uncertainty it should be at $2,000. It could go there, who knows. I think the gold price is going to pull back in dollar terms,” he said.

Gold bolted to above $1,043/oz on Tuesday on fears that Gulf oil-producing nations could ditch the dollar in oil transactions. The report carried in Britain's Independent newspaper was denied by a host of large oil-producing states.

"The driving force for gold's rally is the declining confidence in the dollar, which helped elevate gold's stature, along with the explosive growth in gold-backed exchange-traded funds which broadened the investor base for bullion," Shuji Sugata, a manager at Mitsubishi Corp Futures & Securities, is quoted by Reuters as saying.

McCurrie said: “I think this is almost the last dance for the group of people expecting an economic meltdown that is simply not going to happen in the shorter or medium term. I think the gold price could pull back quite significantly.”

A pull back in the dollar gold price would most likely put gold shares under “severe pressure”.

McCurrie conceded that Australia’s 25 basis points hike was small in a relatively small economy, but it is the first G20 country to up interest rates. “They are saying we don’t need low interest any more because the world has already survived this crisis… there is still a long time before the euro zone or the US does anything similar.”

“It’s a clear sign the worst is over and secondly and far more importantly, interest rates have to go up again and that will probably be the signal for equity market weakness,” he said.

Meanwhile, South African institutions and other investors are flocking into the gold-backed exchange-traded fund (ETF) called NewGold offered by Absa. Vladimir Nedeljkovic, head of ETFs and index products at Absa Capital, said the gold fund now stood at 52.5 tonnes of metal worth R13bn, growing strongly since it was launched in 2004, with a pronounced growth spurt in September.

“Just in September, we added R2.1bn in new assets, which is a record for us,” Nedeljkovic said on the same programme.

Investors were taking guidance from the dollar price of gold, with the rand price of the metal remaining relatively flat. “A lot of investors are betting the rand gold price will increase, either from a weakening of the rand or growth in the dollar price of gold,” he said.

“We have done the analysis. Over a longer time the gold price outperformed the gold shares,” he said, adding 95% of NewGold is held by institutional investors and nearly all largest institutions in South Africa held the product.

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