Over recent years, gold has registered a stellar rise. In the past 12 months alone, the bullion rose by nearly 30 percent, having increased more than seven times since the bear market decline in 1999.
There have been recent fluctuations in prices that may have put nervous watchers on edge, but experts feel the decline is only short-lived, a correction rather than a burst of the proverbial golden bubble.
Gold’s overall performance is still remarkable, though it is but a small part of a bigger picture. In recent years, the economies have witnessed the dot-com collapse, the housing bubble, sovereign debt woes and deficits. All these are somehow tied to the breakdown in confidence in paper currencies.
Investors have been seeking refuge in gold out of fear that there will be more currency devaluations, especially in the Eurozone. When officials agreed on a bailout package last month to bring Greek’s debt down to 120 percent of GDP by 2020, gold registered further increases, as many were worried the deal was not enough to solve European credit woes.
According to the latest Friends Provident International Investor Attitudes Report, UAE investors are adopting a more cautious attitude to their investments and are turning to gold and other safer assets for cover.
Gerhard Schubert, head of precious metals at Emirates NBD, says the increase in investor appetite for gold “has been witnessed all over Dubai.” The bank has seen a lot of redemptions and demand for gold certificates. “The prices had risen to nearly Dh210 per gram and our customers seem to have used this in order to take some profits from their investment,” he tells Gulf News. “The redemptions seen over the last two weeks have been five times higher than during the same period last year. However, the increase in demand over the whole period of 2011 has been an amazing 280 percent growth against the previous year.”
Considering that US and Europe are still plagued with debt problems, more money printing is expected, further debasing the currencies this year. Do all these signs point to a more lucrative year for the precious metal and its followers? In the words of Dan Dowding, senior executive officer of Killik & Co., after posting a strong rise over recent years, there is “the possibility for some profit-taking which can lead to volatility.” “However, with China and Russia continuing to buy into gold to secure their currencies, and further currency devaluation worries, the long-term rational for buying gold remains,” Dowding tells Gulf News.
John McGaw, senior partner at Golden Oryx Abu Dhabi, is confident that the price of gold bullion is not restricted by conventional market forces and further price increases are likely to happen. But despite its headlines, the yellow metal has yet to hit mainstream, considering that it remains significantly under-invested. McGaw notes that only one percent, or $2 trillion (Dh7.35 trillion), of global financial assets is invested in gold despite economic doubts and currency fears.
Overlooked by funds
“The opportunity has been missed by almost every conceivable category of investor, including pension funds, endowments, mutual funds and central banks, all of whom could be safely described as underweight metal and, probably, overweight risky financial assets.”
“The media and most of the financial community are captivated by daily price action, but see little more. To most, it is a speculation and maybe a bubble.”
McGaw is positive that with the ongoing uncertainty surrounding sovereign debt, trade imbalances, fiscal deficits, growing protectionism and a surfeit of government bonds, paper currencies will continue to attract regular scares and slowly drive investors towards alternative assets. “Gold, of course, is referred to as a currency but unlike âtraditional’ currencies, gold is not in a position to be produced at the rate that currencies can be printed by political agendas,” McGaw points out.
Rolf Schneebeli, CEO of Gold Services AG, is also bullish that 2012 will be one of the good investment years for gold. He predicts that there will be new price increases this year, even above $2,000 an ounce. In its report 2012 outlook report, Gold Services AG anticipates the long-term target price for gold to reach as high as $4,000. Although it was one of the best performers last year, gold showed high volatility and major declines in September. By the end of the year, gold closed at $1,531 per troy ounce, still up 10.3 percent from $1,388 in January 2011.
“The correction at the end of last year was a âcorrection within an uptrend’ and as such, was short-lived, as we have already seen in the development in the first two months of this year. It was actually quite positive as it was squeezing out some of the speculative long positions and hence was bringing back the focus to the underlying long-term trend,” Schneebeli says. “We are still below $1,800 and below the all time-highs set last year, albeit already substantially higher than at the end of last year. Still, my prediction is that we might well see new highs this year, even above the level of $2,000 per ounce.”
Dubai The UAE is one of the top gold consumers in the Middle East. Every day, residents and visitors spend about Dh34.7 million on gold jewellery, bars and coins, based on 2011 consumption figures released by the World Gold Council. It’s the second highest expenditure in the Middle East next to Saudi Arabia, where gold consumption is still the highest at $3.6 billion (Dh13.22 billion) last year. While the UAE is known for its enormous appetite for jewellery, there has been a significant shift in buying patterns at the retail level.
According to the World Gold Council’s report, the demand for gold jewellery in the UAE fell six percent last year, from 61.6 tonnes in 2010 to 57.7 tonnes in 2011, while the demand for gold bars and coins increased significantly by 19 percent, from 10.5 tonnes in 2010 to 12.5 tonnes last year.
The decline in jewellery takings should not be taken as a sign that ornament lovers are changing their preference or setting their sights on gold bars and coins. It is merely an indication that when gold prices soared last year, jewellery fans held on to their purses.
“The increased gold price has had a direct impact on the price of jewellery, making it more expensive. Basic economics teaches us that when prices rise, demand will fall,” Dan Dowding of Killik & Co. said. “Meanwhile, investors have been attracted by the increasing price of gold and the fundamental reasons for buying it, and have leapt at the chance to buy gold bars and coins to profit from the increased price. It is unlikely that the same people who have stopped buying jewellery have switched to buying bars and coins.”
Firoz Merchant, chairman of Pure Gold Jewellers, however, said they have not noticed any increase in demand for gold coins and bars this year. “In fact, it is the opposite. We have seen a marked increase in demand for our jewellery,” he said. Rolf Schneebeli of Gold Services said the World Gold Council’s figures could be misleading because the distinction between “investment gold” and jewellery is not clear-cut in the region. Some buyers, for example, sell back their jewellery for profit. “Jewellery is mostly bought at the gold price, plus making charges, which are mostly much smaller than in the West. Typically, pieces are also exchanged or even sold back to the market when there is a need or the prices are favourable.”
What is notable, though, is a shift in the taste for jewellery in the UAE. “Due to the higher prices, buyers shift to different materials and due to increasing sophistication, they also shift to studded pieces. This trend is also supported by the jewellers who can get away from the commodity supplier image, and become lifestyle providers to clients.”