Investors confused over gold

Prices continue to fluctuate violently between $1,500 and $1,900

Since July this year, gold prices have been as indecisive as a boss – from under $1,500 an ounce in the beginning of July, gold prices shot up to over $1,900/oz towards mid-August, then fell back to below $1,600/oz in the last week of September.

In mid-October, spot gold seemed set on its upward trajectory once again only to falter just above $1,800/oz and was back below $1,700 yesterday, where it has traded between $1,667 and $1,695/oz in the past few sessions.

Experts who earlier maintained that Eurozone troubles would reignite a flight to safety towards gold are confused on the yellow metal’s failure to lift off despite global equity markets tanking last week.

So what’s up? Are investors, burnt by gold’s flash fall in September, taking a cautious approach to building long positions in it, or has gold finally lost its sheen as an investment safe haven? “Our bullish outlook, which we held for most of this year, is giving way to a more neutral assessment as gold is changing its affiliations too often recently,” Gerhard Schubert, Head of Precious Metals, Emirates NBD, said in the bank’s latest weekly precious metals report.

While it was relatively easy to gauge gold’s inverse price movements relative to the dollar and global equities until fairly recently, the ongoing fiscal acrobatics in the Eurozone, a debt-deficit stalemate in the US, weaker growth projections Asian economies, and the dollar’s surprise strength may have all added a bit too many components to the equation for the result to be predictable.

“It has become very difficult to predict its correlation from moving with a stronger Euro, or with higher equity prices, to representing the fear-trade when political situations get more confusing,” said Schubert.

So how do the experts believe this will impact the price of gold going forward? “This behaviour indicates a growing uncertainty inside the investment community and the prices for gold can easily be influenced by very short-term liquidity-driven forces,” says Schubert.

“After a relatively stable Asian trading session, precious metals, along with the rest of the commodities complex, have come under selling pressure,” said Marc Ground, precious metals analyst at Standard Bank, in a research note yesterday. “Once again, uncertainty concerning the Eurozone is rife, which is keeping the dollar relatively strong,” he said, despite the political stalemate regarding US deficit reduction plans.

“The craving of market participants for US dollar liquidity has also led to an increase in swap activities, whereby gold is being lent to the market in order to obtain US dollar for the agreed tenor. There has been more news about central banks buying more gold in the third quarter, but it seems that the investment community has simply shrugged this off, at least for the moment,” added Schubert, suggesting that gold may be falling off as the preferred investment vehicle for global investors.

Nevertheless, gold is still up more than 21 per cent year-to-date while the S&P 500 Index is down 5.14 per cent. With many economists maintaining that a double-dip recession may well be unavoidable now, gold’s 10-year bull-run is far from over. The metal may still reach the magical $2,000/oz mark in the first half of next year, but investors are clearly yet to make up their mind on gold in the short term.

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