Will gold beat the summer doldrums this year?
Posted on 29 June 2009 with no comments from readers
Summer is not traditionally a good time for gold prices but this year could be the first exception in this bull market. Much depends on how stock markets fare from here. If there is a sharp correction then that would rally the dollar and take gold prices down, at least for a month or two.
If, on the other hand, the stock market rally continues over the summer then gold prices are likely to gain traction and surpass $1,000 an ounce again. Wall Street has shown some signs of hesitation over the past two weeks, and a sell-off followed by a sideways move over the summer can not be ruled out.
Inflation expectations
The contrary force is from the green shoots’ school and what appears to be stimulus money inflating commodity prices. This two-way pull most likely means gold prices are unlikely to dip far from current levels, while the future upside is very much intact with further global financial turbulence probable, according to no lesser source than the Bank of England.
That might be viewed as a no-lose buying argument for precious metals. Certainly the resilience and relative stability of the gold price over the past difficult year has won new investors over to this traditional safe haven asset.
In the Arab World there has been a flight to gold, and the level of enquiries now being reported by bullion dealers suggests that a much bigger wave of buying is coming up.
Arabian money
These are the very professional investors who ought to be about to sink their funds back into global equities in advance of a global economic recovery. But they may well decide to hedge against cost-push inflation by buying hard assets rather than companies with an uncertain profit outlook, at least for the short to medium term.
Certainly the news about the 6.9 per cent US savings rate, the highest in 16 years, counsels against an investment strategy that relies on the US consumer to drive asset values forward. The US consumer is repairing tattered balance sheets and accumulating cash, and that is not going to produce the kind of recovery assumed by green shoot optimists.
However, Arab gold buyers are clearly sitting on the sidelines hoping for a buying opportunity and a price dip this summer. They might get it but as the days go on the prospects of a meaningful dip in the gold price are diminishing, and gold might beat the summer doldrums this year.
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NEW YORK (Reuters) – Gold climbed above $940 an ounce on Wednesday, as news that China has asked to debate proposals for a new global reserve currency sent the dollar reeling, highlighting the status of gold as a hedge against a falling U.S. currency.
Investors have recently viewed the dollar as a safe haven. In early June, a resurgent greenback had foiled gold’s attempt to break above the $1,000-an-ounce level.
On Wednesday, China asked to debate proposals for a new global reserve currency at next week’s Group of Eight summit in Italy and the issue could be referred to briefly in the summit statement, G8 sources said.
“The China news is the factor for today. That was driving the currencies, which are driving the gold,” said Andrew Montano, a director at bullion dealer ScotiaMocatta in Toronto.
There were recent signs that China, which holds vast reserves of U.S. currency and Treasuries, was considering a reduction in its exposure to the dollar and to U.S. assets in case America’s ultra-loose fiscal and monetary policy rekindles inflation and erodes the value of the dollar.
However, analysts said it was unlikely that the dollar’s reserve currency status would be challenged in the foreseeable future.
U.S. August futures settled up $13.90, or 1.5 percent, at $941.30 an ounce on the COMEX division of the New York Mercantile Exchange.
Spot gold traded at $941.05 an ounce at 2:31 p.m. EDT, up from $925.85 quoted late in New York on Wednesday.