A Dollar Turnaround Could End Gold's Party
Posted on: Thursday, 12 June 2008, 12:00 CDT
By Humeyra Pamuk
Are gold prices poised to climb back above $1,000 an ounce?
Inflationary pressures and financial turmoil tend to prompt investors to seek shelter in the metal used as a store of value.
But gold's fortunes are traditionally tied to the movement of the dollar, and a significant turnaround in the weak U.S. currency could limit its appeal.
"There's a good chance that it may go back above $1,000 in the short- to medium-term," said Richard Davis, a fund manager at BlackRock in London.
Record high oil prices, a soft dollar and turbulence in the banking sector sparked by the credit crunch pushed gold to a record $1,030.80 an ounce on March 17. Since then gold has fallen about 15 percent.
But inflationary pressures highlighted recently by the U.S. Federal Reserve and European Central Bank would aid gold, analysts say.
"We're headed for inflationary times and gold has always been a safe asset to protect your wealth against inflation," Davis said.
With oil prices at a record high above $135 a barrel and food prices surging, fear of inflation is haunting investors more than ever.
The Federal Reserve chairman, Ben Bernanke, said Monday that the latest increase in energy prices was adding to the dangers from inflation, but added the central bank would strongly resist rising inflationary expectations.
His remarks convinced more investors that the Fed would raise rates this year, triggering a rally in the dollar that has taken the steam out of gold.
Yet some fund managers who are still betting on a weak dollar expect further fallout from the credit crisis, which would make investors rush back to gold.
"We might have aftershocks or maybe another major 8.0 Richter scale kind of event lies ahead, and that's the sort of thing that tends to make people nervous," said John Hathaway, senior managing director of Tocqueville Asset Management.
Hathaway said gold serves as an alternative financial asset, particularly when markets worry about banking issues or currencies. "I think we will see gold going above those record high levels again, and that will probably be this year."
Other analysts cite poor physical demand and possible strengthening of the dollar in the longer term as reasons why gold may be more steady than optimists believe.
"Anecdotal evidence in the current quarter so far suggests that the decline in demand has continued," said Stephen Briggs, a metals analyst at Societe Generale.
The Indian market, which accounts for 20 percent of world demand, is likely to remain sluggish, Briggs said. "Gold at the moment just doesn't seem to have the momentum to do it."
"I'm sure $1,000 is possible, but we need to be getting into new territory on the dollar and we're not," Briggs added.
Goldman Sachs economists expect the dollar to remain weak until a U.S. economic recovery helps it gain new strength.
The investment bank lowered its forward price forecasts for gold.
Yet record high oil prices, which lifted gold this year, could continue to offer support, highlighting the dangers of inflation and putting pressure on global economies.
"If oil slows the economy to the point where we are in a low interest rate environment for the dollar, that could be good for gold," said Michael Lewis, global head of commodities at Deutsche Bank.
Originally published by Reuters.
(c) 2008 International Herald Tribune. Provided by ProQuest Information and Learning. All rights Reserved.
Source: International Herald Tribune
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