Another lifetime high for gold: $2,000 in sight now

Spot gold prices surged by $45 an ounce to make another lifetime high this morning at $1,920 per ounce, surpassing the previous record high of $1,913/oz made on August 22 by $7 per ounce as concerns about Eurozone’s economic health resurfaced and Friday’s US payroll data showed zero jobs added to the world’s largest economy in the past month.

“Concerns that the US might slip into recession and hopes of further Fed quantitative easing, received a shot in the arm from Friday’s bitterly disappointing non-farm payrolls figures. Payrolls for August were unchanged (consensus: 68,000 increase), falling abruptly from July’s 85,000 increase (revised down from 117,000),” Standard Bank analyst Marc Ground said in comments sent to Emirates 24/7.

“Underscoring the weakness seen in many Fed  measures of regional industrial activity, manufacturing payrolls fell 3,000, the first decline since October last year. Safe-haven demand and the prospect of QE3 are helping gold maintain its momentum into the start of the week. Silver and platinum have also been lifted by gold’s gains, although palladium remains largely unresponsive,” Ground said.

Gold prices have rallied by almost a third this year, shooting up by nearly 10 per cent in the past 30 days as global economic worries refuse to go away and investors keep flocking to gold for its safe haven status. UAE gold rate (24ct) stood at a record Dh228 per gram this morning while 22ct gold was being retailed at Dh215 per gm and 21ct for Dh204.75 per gm, according to data supplied by the Dubai Gold & Jewellery Group.

With no let-up by investors or speculators, and with the gold buying season just beginning, the price of the yellow metal seems all set to race to the magical $2,000/oz-mark in September. “Speculative activity and ETF buying remains supportive of our view on gold. Short term, we believe that gold should find support on dips and move higher — physical demand is strong on price dips but falls away on price rallies,” said Ground.

What seems to be working in gold’s favour is that the record prices are despite the fact that speculative buying has declined and is at levels below last year’s peak. “Net speculative length for COMEX gold fell for the fourth successive week, losing 49.3 tonnes. The net speculative position for gold now stands at 747.9 tonnes - now below last year’s average of 777.6 tonnes. The decline was mostly attributable to a shedding of 70 tonnes in speculative longs, with a decrease of 20.7 tonnes in speculative shorts softening the fall in the net position,” said Ground.

On top of this, the dollar has been gaining a fair bit of currency over the past week, and the gold price rise – counterintuitive to the dollar index – suggests that the higher prices are here to stay for a while at least.

The next resistance level for gold, according to Standard Bank analysts, is $1,932 per ounce. Once that is breached, there is an uncommon consensus of sorts among most global experts that $2,000/oz will be achieved even though many believe that that will signal the biggest fall in a decade in gold prices.

In fact, there is no dearth of analysts on either side of the fence. While there is the group that is crying hoarse about the price of the bullion going up too far, too fast (gold price is already up 32 per cent this year – its best showing in 10 years), gold buffs are drumming up support for the price to breach $2,500/oz by the end of 2011.

While both camps list a number of reasons to back their beliefs, the precious metals market has defied logic in the near past. Gold punters point to the lingering uncertainty in global economy, the dismal growth forecasts for the US and most Eurozone economies, as well as lack of investment-grade opportunities to claim that gold will continue to outperform other asset classes on its ‘safe haven’ status.

On the other hand, there are those that point to the lack of demand for physical gold – and a surge in demand for gold ETFs (or exchange traded funds) – to claim that most of gold’s newfound backers are speculators who will cash out after making a decent profit or, in case of a sudden decline in price, will have their stop-loss margins kick in, fuelling a further decline in gold price and leaving individual investors high and dry.

History does provide some clues to the future direction of gold, but it depends on what history you choose to refer to. While the recent decade has been a so-called golden era for gold, with an average growth of 21.3 per cent per annum, the period between 1980 and 2001 saw the price of gold decline from a high of $850/oz (in January 1980) to a low of $256/oz (in April 2001).

Adjusted for inflation and potential loss of bank interest (on currency), those who bought gold at its peak in 1980 will only break even today if the price were to breach $2,000/oz. If, for argument’s sake, gold were to again decline by a similar margin, imagine the break-even year for those who enter the gold rush at current levels.

But that’s not to say that prices are already in bubble territory. They may have a fair distance to go before the bursting of the proverbial bubble. While it’ll be anybody’s guess as to which side of the gold coin will emerge winner, individual investors will do well to remember that in markets, as in life, whatever goes up, must come down. And vice-versa.

Gold tops $1,900 again.
Next: $2,000

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