Bad Economic Conditions, Good Times for Gold
Source: Gold Investing News, Kishori Krishnan (2/2/09)
"You see these steep sell-offs in equities and we see a lot of that money coming back into gold."
Worldwide, gold has made an outstanding 250% jump in the last two years. Starting in 2006 with a low of $400 per ounce, gold jumped dramatically to $1,000 per ounce in 2008. On Friday, gold price jumped over $15 to reach above $920 an ounce in early London trade, dipping at the New York Open before hitting a new 3-month high of $929.40 in afternoon trade. Gold bullion ended the day near that high with an impressive gain of 2.4%, up almost 3.5% for the week.
Silver followed a similar pattern and ended near its high of $12.66 with a gain of 3.66%. The gold price in Euros too rose to a new record high of €722, platinum gained $17.50 to $983, and copper added a penny to about $1.46.
A major Swiss bank has confirmed that it has upped its gold price predictions for the medium term. Reuters reports that UBS has announced that it now predicts that gold will be over $900 per ounce in a month's time, while its three-month projection has been increased to $850 per ounce - both up from original calls of $800.
Strategist John Reade explained in a note that the move has been motivated by a concerted surge in the volume of gold investment in the current uncertain financial climate. "Our client flows suggest that the developments in the banking sector have truly spooked investors again, with strong demand for coins and small investment bars," he said.
While gold is traded in dollars, the price in Euros is up 15% this month and 5.9% in U.K. pounds.
Reade's view was supported by William O'Neill, a partner at Logic Advisors, who said, "The economic climate remains highly constructive for gold." Matt Zeman, head trader at the Chicago-based firm told Reuters, "You see these steep sell-offs in equities and we see a lot of that money coming back into gold. The biggest beneficiary right now of the flight-to-safety bid is gold. I think it looks poised to continue to move higher."
Simply put, gold does well when investors think the world is coming to an end. It's a hard asset, which makes it a more stable bet than stocks, corporate bonds and currencies.
Analysts insist that gold will comfortably hold above the $900 level as the unusual decoupling with the Euro (and unusual coupling with USD) continues due to the metals improved luster resulting from widespread global economic gloom and ultra low global interest rates. As the price of money (interest rates) is held down by central banks, the price of its competitor (gold) pushes higher on the lack of yield reward in monetary alternatives.
Gold gained $22 as Wall Street closed the worst January on record. Gold futures rose Friday, ending the week at their highest level in six months as investors sought the safety of the metal following government data that showed the U.S. economy contracted the most in 27 years during the fourth quarter.
"Demand remains very high internationally for ETFs, gold certificates and bullion coins and bars," said Mark O'Byrne, executive director at Gold and Silver Investments.
Gold for February delivery closed up $22.20, or 2.4%, at $927.30 an ounce on the Comex division of the New York Mercantile Exchange, the loftiest closing level for a front-month contract since July. The benchmark contract has risen 3.5% last this week and 4.9% in January.