Gold: High prices indicate uncertain economic future
Gold: The safe haven
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Some investors believe that gold prices will continue its rise until the first quarter of next year. Hence, they are buying it as a saving mechanism, say Kingdom-based market analysts. Gold raced to a six-month high last week and the price may be heading toward the $ 2,000 mark in the coming months, said the analysts. They said gold prices reflected uncertainty about the economic outlook as people have turned to it as a hedge. Spot gold rose to $ 1,733.81 per ounce last week, its strongest since late February. US gold futures also reached $ 1,736.90.
Fahad Alturki, senior economist at Jadwa Investment, said: “The price of gold has risen by nearly $ 100 per oz. since mid-August on the back of higher uncertainty over the global economic growth due to weak macro-economic data in the US, the euro zone and China.
After all, gold is generally used as safe haven during the time of high uncertainty and this period is no exception.” He said: “It is not surprising to see gold prices rising as market participants expect a third round of quantitative easing (QE) in the US.” In fact, Alturki said:
“The price of gold rose sharply prior to the previous two QE rounds. More recently, weakness in the August US jobs data released last week strengthens the case for the Fed to ease monetary policy not only through QE but also probably through extending the calendar date policy guidance beyond 2014.
Such expectations are likely to keep gold prices on gradual upward trend over the coming few months.” In a recent report on demand trends, the World Gold Council said gold demand subsided during the second quarter of the year, 7 percent down on the second quarter of 2011 and 10 percent below the previous quarter.
Second quarter gold demand of 990 tons was worth an estimated $ 51.2 billion. The supply of gold declined 6 percent year-on-year, mainly due to lower levels of recycling.
The report said gold price averaged $ 1,609.49 an ounce during the quarter, 7 percent above the average Q2 2011 price; consequently there was only marginal 1 percent year-on-year decline in the value of gold demand to $ 51.2 billion. Looking at the first half of 2012, gold demand of 2,090.8 tons was 5 percent down on the previous year ad 14 percent above the five-year H1 average of 1,828.7 tons.
Gold demand of 418.3 tons in the jewelry sector was 15 percent weaker year-on-year.
Basil Al-Ghalayini, CEO of BMG Financial Group, said: “Almost a year ago, we have seen the downgrading of the US sovereign risk has caused the price of gold to move up which had a similar effect in Saudi Arabia, since the riyal is pegged to the dollar, as people were buying it as a hedging mechanism.”
The CEO added: “As for now, the situation is still the same with even bigger appetite in view of the lackluster real estate and stock markets. Some buyers/investors believe that gold prices will continue its rise until the Q1 of next year. Hence, they are buying it as a saving mechanism. Sales in Saudi have increased by almost 65 percent during the last 2 months.”
The WGC report said investment demand fell by 23 percent year-on-year to 302 tons, slightly below the five-year quarterly investment of 340.3 tons. Purchased gold by the official sector more than doubled to 157.5 tons in Q2. At 1,059.1 tons, the supply of gold contracted 6 percent year-on-year.a
Jarmo T. Kotilaine, chief economist at the National Commercial Bank, said structural drives have for long militated in favor of a tighter gold market. Both central bank, institutional, and ordinary investment demand by retail customers has been trending up, often from a low base and facilitated by new products, e.g. funds. The prices reflected uncertainty about the economic outlook as people have turned to it as a hedge.
“With the global outlook highly uncertain and central banks (led now by EC) once again turning to unconventional easing, the prospects for gold are improving further. The odds are increasingly in favor of gold trending toward the $ 2,000 mark in the coming months, especially if the US Federal Reserve responds to the weaker economy through QE3,” Kotilaine said.
The WGC said in its report that Russia is playing an increasingly prominent role in the global gold market. With economic growth bolstering jewelry demand, the central bank remains a significant purchaser of official sector gold. The country accounts for 8 percent of global gold mine production.
India and China continued to dominate global consumer demand, accounting for a combined 45 percent of total second quarter jewelry, and bar and coin demand.
Outside India and China, retail investment grew by 16 percent year-on-year to 195.2 tons as investors across most other regions favored buying on price dips above taking profits.
Demand for gold by central banks and official sector institutions accelerated during the second quarter. Gold reserves increased by 157.5 tons, the largest quarterly net purchases by this sector since it became a net buyer in Q2, 2009. For the first half-year, gold reserves increased by 254.2 tons, compared with 203.2 tons in H1, 2011.
At 418.3 tons, demand from the jewelry sector accounted for 42 percent of global gold demand during the second quarter.
The 15 percent year-on-year decline in the sector was largely due to a sharp fall in Indian jewelry demand, as rupee gold price reached record levels excess of Rs. 30,000/10g. Demand for gold jewelry for the first half of 2012 totaled 906.4 tons, 13 percent down on H1, 2011. At $ 21.6 billion, the value of global jewelry demand was 9 percent below year-on-year level, the WGC report said.
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