Outlook bright for gold in long term

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Low physical demand, less money with investors keep yellow metal under leash.

All-time favourite: A file picture of gold bars, being packed in a box, still finding favour among investors.
All-time favourite: A file picture of gold bars, being packed in a box, still finding favour among investors.

What is keeping gold under leash is low physical demand and less money with investors to buy the yellow metal.

M.R. Subramani

Chennai, Jan 18

Gold, after being in the grip of bears for the most part of the week, recovered during the weekend. On Friday, it gained three per cent to close at $847.2 an ounce but during late fixing, it slipped to $833.75, indicating the continuing volatility.

Even if one were to discard the late fixing, gold still ended in the negative compared to the previous week.

What is keeping gold under leash is low physical demand and less money with investors to buy the yellow metal.

Price fluctuation

Sceptics see further low for gold and feel there should be no surprise if the precious metal fall to $500 an ounce.

To buttress their point of view, they point out to what happened during 1979-80.

Then, gold hit a high of $850 and within a matter of two months, plunged to $500.


After touching $1,030 an ounce in March last, gold has been witnessing high volatility.

During the last week of December, gold touched $890 before slipping to nearly $800. A section of analysts have put the average price of gold this year at $825.

The pessimism over gold coming under the influence of bull is based on the premises that demand for it is the lowest in almost a decade.

Technically, $895 is seen as the key resistance point for gold. Support for it is around $808 based on the Bollinger band.

The precious metal has gone below one of the key support level of $841 and has not been able to scale over the short-term resistance of $868.

Having pictured the pessimism part of the yellow metal, it is worthwhile to see what can keep gold glittering.

Certainly, long term prospects for it are good and analysts see nothing as good as it to secure values.

According to Merill Lynch, the rich are buying gold bars, shunning derivatives and paper ‘proxies.’

“The rich are asking for gold bars as they are worried over how economy would behave this year,” says its Chief Investment Officer, Mr Gary Dugan.

Investors’ preference

According to him, investors are preferring physical gold over even exchange-traded gold funds (ETFs).

It is another matter that gold holdings by ETFs are currently at a record.

The current global situation is such that there is a fear that deflation may set it. In that case, there is nothing as haven as gold.

But optimists see a ‘win-win’ situation for investors buying gold.

While it can be a haven during deflation, in the case of the economy witnessing a resurge too it can come in a handy investment.

In case the economy gains traction from the monetary stimulus packages of various countries across the globe and it triggers of inflation, then gold can turn into a store of value.

Still, the outlook for global economy is that inflation could be at zero per cent and in industrial nations, it could be negative.


Mr Nick Barisheff of Bullion Mangement Group Inc, says gold makes a good purchase regardless of price. Pointing out to the fact that gold outperformed other assets during 2008, he says gold is the only alternative in the current economic scenario.

With large speculators holding 46 per cent of the long positions, certainly gold’s outlook is bullish.

Silver is set to tail gold, while the platinum group of metals will see some spark only on economic revival.

Copper and other base metals witnessed good activity during the weekend and they can sustain the gains only on a clear signs of economic revival, in particular the way China behaves in the market.

Crude is seen range-bound, gaining on supply concerns and geo-political situation but dropping on worries over demand growth.

Related Stories:
Yellow metal likely to witness volatile trend
Gold was the best, oil the worst

(This article was published in the Business Line print edition dated January 19, 2009)
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