The Hindu Business Line : ‘Rise in $, need for liquidity keeping gold volatile’

“Many in the investment community trot out the old myths about gold: It is a bad investment; it is risky; it is not a good inflation hedge. But is there any truth behind these assertions?” asks Mr Nick Barisheff, President and CEO of Bullion Management Group.

“The weak stock markets have weighed in heavily on gold, metals and energy markets. Investors are more pessimistic about how long it will take for the economy to recover from the current financial turmoil,” says Mr Manav Garg, CEO and Founder, EKA Software that offers solutions to commodity trade and risk management.

“Much has been made of the recent rally in equities, and gold’s plunge. Some even claim that gold has lost its safe haven status, but they are horribly mistaken,” says Mr Graham Summers, an analyst.

Gold, which peaked to $1,032 an ounce in March, had been declining sharply since then. On Thursday, the yellow metal was quoted at $740-741 an ounce. A rise in the dollar and investors need for liquidity are keeping the gold market volatile with prices hovering between $700 and $800 in the last couple of weeks.

Sentiments to be low

Sounding upbeat about gold’s prospects, Mr Jeffrey Nichols, Managing Director of American Precious Metals Advisors, says: “The gold market all along has been underpinned by simply fantastic physical demand from individual investors or the household sector in contrast to the big institutional players, especially the hedge funds, bullion houses, and large-scale traders. All it would take is an abatement – a shift into neutral – of institutional selling for gold to move up sharply.”

“Once the general public realises the myths hammering gold are not valid, the price of gold will be much higher,” says Mr Barisheff.

But Mr Garg says since a revival in the global economy is expected to take time, sentiments will be lower for quite some time.

He says even base metals’ outlook is negative on concern recession in the Western nations could eat into global demand.

Bargain prices

“For one thing, gold has held up incredibly well relative to both stocks and commodities. Also, taking the long-term historical perspective between stocks and gold, it’s clear that stocks are still expensive while gold is cheap,” says Mr Summers.

Despite gold being rangebound, analysts feel it could be a safe bet in the long term. “In a worst-case scenario, bullion may be the only asset that holds its value. As the general public catches on to the rising price of gold, informed investors will benefit from purchasing bullion at undervalued prices,” says Mr Barisheff.