The Hindu Business Line : Where is gold headed?

As the Dubai World's dilemma unveiled, the yellow metal dropped five per cent but by the end of the day, it almost pared its losses. Finally, it closed at $1,178.70 a troy ounce, down 1.5 per cent over Thursday's closing.

As the world is worried over the fallout of Dubai's debt woes, investors could be searching for an answer on gold. Where is it headed?

For the precious metal or those who have invested in it, there should be little cause for worry. Surely, there are fears of more such episodes breaking but that doesn't change the outlook for gold.

There is talk of recovery but signals from the US this week indicate that a firm gold price is here to stay. Mr Jeffrey Nichols, Managing Director of American Precious Metals Advisors, says the purchase of gold by central banks from the International Monetary Fund (IMF) only reinforces the bullish sentiment in gold.

Nearly 200 tonnes of IMF gold remains to be sold and new announcements on purchases in the days ahead would only promote additional private sector demand for the yellow metal.

During the weekend, the International Atomic Energy Agency resolution against Iran has kindled geo-political tensions. Three decades ago, the Iranian hostage crisis drove up gold to a record $875 an ounce. Analysts view the worsening relations of the Ismalic republic with the West will only increase the demand for investment haven. Gold stands to gain from this.

Interest rate

Mr Nichols says the statements from the St. Louis Fed President, Mr James Bullard, and the Chicago Fed President, Mr Charles Evans, that the interest rate could remain near zero until late 2010 heighten the long-term inflation fears. They should provide support to gold as a hedge against inflation and currency depreciation.

Besides, Mr Nichols says the US domestic political discord is also turning increasingly favourable towards gold.

“Carry trades” allow traders and fund managers to borrow dollars cheap and invest them in higher-yielding tools such as equity, real estate and commodity markets around the world. Though the trade, according to Mr Nichols, looks like a bubble, the surging gold price is anything but that. As and when the “assets bubble” bursts, gold will only gain.

Dollar outlook poor

Mr Jim Sinclair, Chairman of Tanzanian Royalty Exploration, says the outlook for the dollar is poor with the interest rates seen ruling lower till 2012. According to him, the US system is not responding like China due to serious systematic problems. This is due to loose US monetary policy and record fiscal budget deficits that augur well for gold. On a conservative estimate, he says, gold could rise to $1,650 an ounce.

Friday's recovery is seen as one where the buyer or investor is looking at every fall as an opportunity to buy gold.

Open interest in gold shows a record holding of long positions by speculators in the non-commercial section as on November 27. It is at a record 2,84,390. Holdings by exchange-trade funds are 1,617.72 tonnes of which the SPDR Trust holds 1,127.9 tonnes.

Rise in coin sales

Sale of the American Eagle bullion coins during January-September was 9,45,000 ounces higher than what it was the whole of last year (8,60,500 ounces).

As the week opens, choppy trade is likely in gold. Technically, chances are that the precious metal could rise to $1,201.5 an ounce before meeting with resistance. Past this mark, there will be another resistance at $1,209.

On the downside, gold is seen supported at $1,134 and falls below this could see supports coming at $1,128 and $1,120.

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