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Gold hits 16-week high, but here’s why you should have bought coffee instead

By Vicky Kapur

Spot gold prices closed this week at $1,325 per ounce – a level last seen only in late October 2013, marking a 16-week high for the precious metal.

In fact, the price of an ounce of gold slumped to $1,196 per ounce on December 30, 2013, which means that investors who entered the gold market on the day would be richer by almost 11 per cent in less than two months.

For their gains, you can credit the bad weather – or so says Ole Hansen, the Head of Commodity Strategy at Saxo Bank. In his weekly commodities report, Hansen maintains that commodities showed strong gains for a third week with positive performances seen across all sectors.

If you’re bemoaning the fact that you did not participate in the mini ‘gold rush’ of the past two months, wait – you’re barking the wrong tree. If you indeed want to kick yourself for not making the right investment decision – consider this: Coffee (yes, coffee) has reached a 16-month high after rallying more than 50 per cent in 2014 so far.

Of course, as Hansen points out, “we should not forget that coffee until November [2013] had been in a downward spiral lasting more than two years. During this time, it lost more than two-thirds in value primarily on the back of increased production,” he says.

However, owing to adverse weather condition this year, the brown beans have seen a massive increase in prices. “The ICE exchange where Arabica coffee futures are traded responded by raising the margin on holding coffee futures by 65 per cent in order to encourage speculative traders to liquidate positions or take profit,” Hansen notes in his weekly report.

“The current combination of technical and fundamental support has made it easy for speculative traders to drive the price higher but even if we should see a sizeable drop in production, the market is still not tight thanks to the very good crops we have seen in recent years,” he adds.

In the agriculture sector, coffee and sugar have both strong performers this year, with sugar prices surging 8.9 per cent in just the past one week.

“Growth-dependent commodities such as energy and industrial metals also showed a positive return but were held back by another decline to a seven-month low in Chinese manufacturing confidence,” states the report.

Precious metals, have been performing well in 2014. “Gold and silver spent the week consolidating their recent strong gains. Momentum and technical traders have returned to the buy side and are waiting for the driver to carry the metals higher,” notes Hansen although he cautions that prices could decline if a “driver” isn’t found.

“A failure to find such a driver leaves both metals exposed to some long liquidation should the 200-day moving averages at 1,302 and 21.02 respectively give way. The news during the week has been mixed with the impact from the US Federal Open Market Committee supporting continued tapering offset by weaker economic data,” he states.

“Consumer demand which has been the key driver at the beginning of the year has begun to slow in respond to higher prices. Recent data points towards a softening in demand from China and Japan with the premium paid for taking delivery on the Shanghai Gold Exchange dropping to $2/oz after some days rising above $15/oz during the early parts of January,” he says.