Friday, 25 May 2012

Portfolios as good as Gold?

With gold’s unwavering expansion in price over the previous decade, recent volatility and uncertainty has had investors wondering, ‘are the golden years over?’

Gold prices grabbed the headlines after 2011’s remarkable growth faltered this first quarter, with global demand dropping 5% to 1,097.6 tonnes. Tuesday morning saw a further tumble of over $10, to $1,582.99 per ounce, amidst humble advances of the Dollar and institutional confidence. This, paired with India’s emerging demand suffering a 29% slump this quarter, due to temporary strikes over import taxes, saw gold prices cap off an unimpressive start to 2012.

However, the World Gold Council explains adverse demand shocks were nearly “offset by China, which is still in a very strong growth path, (demand) up 10 percent.” China and other Asian developing countries have led this retaliation and, given current frailties in the Euro and Dollar, investment is predicted to remain persistent.

The average price of gold was $1,690.57 per ounce this quarter, 22% higher than this time last year. Hence, despite gold’s fall from $1,667 to $1,590 per ounce in the previous month, its price has shown a strong, glimmering upward trend. This was illustrated last week following the largest two day rise since October, rising $70 to $1,592.

Whilst central banks are up all night printing money to breathe life into their struggling and uncertain financial institutions, gold is being used as a safe haven for investment. Head Analyst, Jollie, at Mitsui concludes with “Greek elections, there will be plenty of opportunities for people to worry about the European debt situation. This will be positive for gold, certainly in the absence of foreign exchange movements.”

Given gold’s intrinsic value and historically reliable yields Ben Bernanke, Head of US Federal Reserve, believes risk aversion and market speculation is driving gold’s observed increasing prices and demand. With concern and austerity rife across Europe, leading to a weakening exchange, investors are hedging in the dazzling previous year of gold prices.

Predictions anticipate gold prices to continue this shining, upward development. HSBC forecast prices to average $1,850 throughout 2012, noting the "shift away from Eurozone sovereign debt to the U.S. and its fiscal problems in an election year". Less conservative views are held by UBS and Barclays who both expect prices to consistently flirt with the $2,000 level.

Increased demand from emerging, industrialising countries will be integral in such price growth. According to WGC China demanded 255 tonnes in the last quarter, up 10% on last year. Hence, as a result of China’s central bank asset allocation in gold being so low (2%, US is 70%) forecasts foresee transitions towards a more diversified Chinese portfolio.

Furthermore, given India’s dependence on jewellery and rare metals, gold demand will experience a strong medium term, reflecting ambitious predictions for summer 2012 in going-for-gold.

Despite seemingly uniform projections, because of sovereign instability and wavering international demand we can only guess at potential gold prices and hope for a glittering future.