The Hindu Business Line : Rising trend in gold likely to continue

The rising trend of gold in the global market, including the Asian, is likely to continue, thinks Mr Peter Cavelti, Canada-based investment analyst of Swiss origin.

He owns Cavelti & Associates Ltd engaged in monetary management and research for several top global institutions in the financial sector.

He harps on three factors in favour of his argument. One, the metal has fallen much to give jewellery demand a fresh boost.

Two, global mining output is falling. Three and last, an end to the time-horizon of steadily rising interest rates is visible.

Given Cavelti's estimated range for a pricing base $550/580, it may even snake up to $650 area in early 2007.

There are reasons to consider the Canadian pundit's prediction, which has nothing in common in methodology with astrology or numerology. Take the dollar graph. There is no denying that dollar-gold interdependence is off, a natural decay of an artificial imposition.

But should we say that dollar and gold could go on indefinitely along opposite ways.

If one takes into account the vexatious issue of US debt, one may arrive at interesting conclusions. Envisaging a dollar devaluation, Mr Cavelti drives home his point with a lengthy logic. "The dollar fundamentals are negative and the politically most convenient way to deal with the sharply growing US debt is to eventually pay it back in devalued dollars.

"For bonds, the longer term outlook may be even more troubling, as protracted military stresses and a deteriorating demographic profile adds to the fiscal imbalances already in place. That's why a potent hedge against your dollar and bond holdings, such as gold, should be a cardinal point in your investment strategy. "Be careful, however, not to time a dollar and bond decline.

The world in which we live is complex and analysts have already demonstrated how wrong they can be in predicting an end to the massive foreign capital inflows that have kept the dollar and bonds solid. But the correction will come: While Japan, China and oil producing nations keep sending surplus money to the US, an ever higher portion of the ownership of America's debt resides in foreign hands".

That means devaluation of dollar in the next few months cannot be ruled out to provide a shield against the coming correction in the dollar and making bonds dynamic.

Contextually, an observation in a recent study by UBS on US debt makes meaningful reading. The US requires $1.72 million of foreign capital every minute and right now Japan, not China possesses the largest amount of US treasury debt: $640 billion, way above the China ($330 billion). Among oil exporting countries Indonesia, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the UAE, Algeria, Ecuador, Venezuela, Bahrain, Gabon, Libya and Nigeria are among important holders of US treasury debt.

The UBS states bluntly" "The days of cheap and reliable financing of the US consumption boom are coming to an end." Last, it is myopic to repose high expectations about the US bonds, a senior company secretary and legal expert, cautioned months back, perhaps before Cavelti. Right now, bond yields reflect a one per cent GDP growth in the US although the economy has been growing at a considerably faster clip.

"The structural impediments to fixed income markets are huge, making a protracted bear market in bonds an almost certain long term bet. That's why I favour locking in high quality bonds with a life of up to five years and staying away from lower-rated issues and longer maturities", the doyen among speculation-analysts inferred.

(Mr Sankar Ray is a Kolkata-based freelance writer.)