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02 December 2023

Gold will continue to shine in 2011

By Shuchita Kapur

Despite gold prices reaching unprecedented levels in 2010, investor enthusiasm is far from fading, and with not much fundamental changes in the factors influencing the price of gold, experts see it continuing to go up in 2011.

“[The year] 2010 marked the 10th straight annual gain for gold. Since 2005, people have been calling gold price as being in ‘bullish zone’ where its price was only $500 (presently $1,370),” MR Raghu, Senior Vice-President – Research at Kuwait Financial Centre (Markaz) told 'Emirates 24|7'.

The much-touted "gold bubble" waiting to burst may not see the prices climb down substantially this year. On the contrary, buying gold makes much more sense now, experts say.

Citing the reasons for being positive, Raghu states many factors determine the price of gold, which will only keep the yellow metal in the bullish terrain.

“Gold, along with other commodities, will benefit so long as negative real interest rates persist in the US. Given the fragile ‘jobless’ recovery coupled with huge debt load, it is inconceivable for the Fed to raise interest rates anytime soon (at least not in 2011). Low interest rates almost always support a commodity bubble,” he said.

Although gold prices recently saw their biggest weekly loss since July 2010, according to experts, surveyed by the London Bullion Metals Association (LBMA), the average gold price forecast for 2011 is $1,457 per ounce, 19 per cent higher than the average price in 2010 ($1,225) and $84 higher than today's gold price of $1,373 per ounce.

The dynamics of demand and supply will greatly influence the price. “While the supply of gold is getting limited, one is left wondering if gold production has hit a ‘peak’. No new deposits have been found while mine supply has been in deficit since 2005.

"On the other hand, demand is only getting stronger with the advent of a new buyer in the form of central banks. Monetary buying (central bank and investment buying) of gold now exceeds industrial or jewellery buying with China, Russia and India augmenting their gold reserves.”

Individuals, who tend to hold on to gold, will further push the price. “Retail demand in populous countries (China, India, etc) still provides a major impetus for demand. Retail investors generally exhibit ‘buy-and-hold’ tendency and do not indulge in speculation. The expected dollar weakness (to inflate away the debt) may also be a source of strength for gold going forward,” Raghu elaborated.

“However, there is also an economist camp that expects world to enter into a 'deflation' zone and another camp arguing for dollar strength. If these factors do materialise, then it will be a minus for gold price. Hence, in my assessment, gold price may swing between $1,200 to $1,500 and may close the year more on the higher side,” he added.

Advising on investing in gold, he added: “Like all commodities, gold will see volatility amid a rising trend. It is now common to see asset allocation recommendations with at least 5 to 10 per cent gold component. Investors can do well to rebalance their gold holdings as frequently as they could (say quarterly) to lock in profits while remaining invested in the precious metal.

Adding some amount of silver and palladium in the basket can reduce the volatility of the basket.

“Since gold is the most popular among commodities, it hogs the limelight eventhough other commodities performed far better than gold during 2010. For eg., palladium was up by 96 per cent, silver by 83 per cent as compared to 30 per cent for gold in 2010,” commented Raghu.

"Palladium shows no sign of slowing down with an average 2011 price prediction of$814.65, a 54.8 per cent increase on last year's bumper average price," the LBMA noted in a press release.