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BRIEFING commodities


The price of gold has risen by 600 per cent over the last decade.


The gold conundrum uncertain times


Is the yellow metal losing steam or gathering momentum? TExT By yaDullah ITallah


G


OLD APPEARS TO have calmed down after a breathless run earlier


this year that saw prices run up 22 per cent and promised to cross the $2,000 an ounce barrier for the first time. But the rally stalled the minute the price hit $1,900.16 in August. Since then, the yellow metal has dithered and remained directionless. Opinion remains divided on where


the yellow metal is headed next: gold bugs say that with the world (or at least the EU) going to hell in a hand basket– the legendary ‘safe haven’ metal is just taking a breather before its next incline. Gold naysayers point to the fact that gold has lost its steam, evidenced by the fact the metal did not break all records after Standard & Poor’s downgraded US sovereign ratings and the EU has careered over the edge in the past few months. Instead, gold prices have remained range-bound along the $1,700- 1,800 band.


41 / DECEMBER 2011


The important point to note is that gold has gone nowhere and that offers some clue as to where it’s headed. For one thing, let’s put things in


perspective: gold has risen by 600 per cent over the past decade. The fact that prices haven’t crashed and are holding steady suggests that this rally has more bite than the gold doubters would like to believe.


Second, there is continued buying


of the yellow metal. Lots of it. Central banks, often seen as key drivers of gold prices, bought nearly 150 tonnes in the third quarter, the highest in four decades, according to the World Gold Council (WGC). The banks have been net buyers of gold since last year, piling into the metal as a way to boost their foreign exchange reserves. “Unsurprisingly investment demand for gold was a key driver during the third quarter,” said Marcus Grubb, managing director, investment, at the WGC. To be fair, the WGC is a lobby group for gold producers and it has a tendency to talk up the merits of the yellow metal. Still, Grubb has a point: “Increasing levels of inflation, the US credit rating


downgrade, a worsening Eurozone sovereign debt crisis and the lacklustre performance of many assets drove investors to increase holdings in gold in order to protect their wealth. “Given gold’s proven risk mitigation


properties, it is likely that investors will continue to seek protection from economic uncertainty, which shows no signs of abating. The long-term fundamentals for gold remain strong with a diverse and growing demand base coupled with constrained supply- side activity.” Overall, gold demand reached an all- time high in value terms, rising $57.7 billion in the third quarter, with gold bars and gold exchange traded funds also posting robust growth. Goldman Sachs, the global investment banking giant which usually calls correctly on commodities, has raised its three-month forecast by seven per cent to $1,760 an ounce, six-month forecast by 5.8 per cent to $1,830 and 12-month forecast by 3.8 per cent to $1,930. “As we expect, gold prices will continue to be driven in large measure by the evolution of US real interest rates


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