Gold – More Than a Twinkle in the Eye

The Business Times, by Felda Chay. Jan. 3, 2011.   View Original Article

(SINGAPORE) Analysts believe that gold will shine even brighter this year, as the flight to safe-haven assets continues amid the weakening US dollar and euro, as well as rising demand in markets such as China, will keep gold in the limelight.

On the last day of trade for 2010, gold spot prices closed at US$1,412.63 an ounce, marking a 28 per cent surge this year – the 10th straight annual gain and the third consecutive year to see a double-digit rise. Gold has averaged US$1,227 per ounce in the last year, hitting a record US$1,426.45 on Dec 7.

It marked a spectacular end to a decade that began with trepidation, as industry players had feared a third straight decade of a bear market.

Analysts whom BT spoke to expect gold to reach new highs this year – with an average price of at least US$1,400 an ounce. Some have even touted prices hitting an average US$1,500.

This can happen, given that factors that lifted gold prices in 2010 are likely to linger, with increased demand for safe-haven assets and worries over the stalled US economy as key reasons, said analysts.

For one thing, the US and Europe are likely to continue their currency-weakening policies this year. Most recently, the US Federal Reserve embarked on another round of quantitative easing – a move that has, and will continue, to put pressure on the dollar.

European governments have also moved to tighten fiscal policy because of the sovereign debt crisis that is spreading across the region. This means that the European Central Bank will have to keep interest rates ‘extremely low, in order to prevent the eurozone economy from contracting’, said Citigroup global metals researcher David Thurtell.

The weakening US dollar and euro has also made gold a sought-after hedge against currency losses, said Mr Thurtell.

Citi has a short-term price target of US$1,450 an ounce for gold, and a 6-12-month target of US$1,550. It expects an average gold price of US$1,500 an ounce this year.

The need for a safe harbour from financial storms has sparked renewed interest among retail investors in gold, which lost favour following its crash in January 1980.

Gold hit a then-record of US$850 an ounce on Jan 21 – equal to an inflation adjusted price of more than US$2,200 today – before crashing the next day.

But these investors are back. Christian Nolting, Asia-Pacific & regional head of portfolio management at Deutsche Bank private wealth management, said: ‘Retail investor demand for gold has been quite resilient this year, given the environment of heightened macroeconomic uncertainty, as investors bought gold to diversify their portfolios and hedge against inflation risks.’

Deutsche Bank private wealth management expects gold to reach US$1,400 an ounce within the first quarter this year, and US$1,420 over 12 months. It has an average gold price of US$1,400 an ounce for 2011.

Gold’s resurging popularity among retail investors worldwide can also be seen in much simpler, everyday terms, as opposed to a portfolio investment.

An upscale shopping mall in Florida state in the US installed an ATM that dispenses 24-carat gold bars and coins. The ‘Gold To Go’ machines – the brainchild of German firm Ex Oriente Lux’s chief executive, Thomas Geissler – has also been installed in Abu Dhabi’s Emirates Palace hotel, as well as countries such as Germany, Spain and Italy.

Firms promising attractive returns on gold investments have sprouted in Singapore. Pawnshops in the country have also seen a new trend: clients redeeming their gold items, only to pawn them later at a higher value.

Central banks – both from developed and developing countries – have also showed more interest in gold given the uncertainty over the future of the international monetary system, with the World Gold Council (WGC) saying that central banks have raised their gold holdings in order to diversify their foreign exchange reserves.

Albert Cheng, managing director of the far east region at WGC, said: ‘This is something that won’t go away in 2011, especially because the emerging markets will likely continue to look for diversification.’

For example, a WGC report issued in November 2010 showed that the gold holding of Russia’s central bank rose 7 per cent in the third quarter of last year.

It is likely that central banks became net buyers in 2010 for the first time in decades, something that is expected to continue.

China, in particular, has thrown its weight behind gold. In 2010, the Chinese central bank moved to liberalise its local gold market and open its doors to local individual investors. This allowed Chinese banks to trade gold bullion on the global market and advertise gold-related investment products for locals.

Citi’s Mr Thurtell said: ‘China demand appears to have risen more than five-fold in 2010 from 2009, and is set to make further strong gains over 2011.’

WGC’s Mr Cheng also believes that China’s measures to curb price increases in its property market would make gold a more attractive option to investors.

The WGC thinks that China’s investment-driven consumption of gold could have nearly doubled to 150 tonnes last year from 80.5 tonnes in 2009. Mr Cheng added that China’s gold consumption is likely to be double in 10 years or earlier.

The jump in Chinese demand could even see China replace India as the world’s largest gold consumer. In 2008, India’s total gold consumption was 700 tonnes.

Dominic Schnider, head of commodities research at UBS wealth management, told BT: ‘Chinese demand might be similar to India, which, by providing a type of base demand on top of financial demand from the developed world, can drive prices.’

UBS has a 12-month price target of US$1,650 an ounce for gold, with the year’s average at US$1,500 an ounce.

Investors, however, should not be blinded by all that glitters. Peter O’Malley, HSBC head of resources and energy group, said: ‘We suspect that given gold’s significant run-up this past year or so, it will be difficult to maintain such momentum. Increasingly, many analysts on the Street see the beginnings of a turnaround in the US economy.’

This, he said, will push investors to look to US equities and the US dollar, thereby paring their gold exposure. HSBC’s forecast price for gold in 2011 stands at US$1,425 an ounce.

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