Published October 8, 2009

Glittery new record set as markets go for gold

Dollar weakness drives gold to new high; trend may continue as silver, copper also rise

By OH BOON PING

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(SINGAPORE) The price of gold soared to another new record yesterday - this time just shy of US$1,050 an ounce - and triggered off ripples across the board, including a rally in a gold fund listed here.

Similar surges were also seen in silver and copper on strong investment and industrial demand.

The new record of US$1,048.20 erased gold's previous high of US$1,045 set on Tuesday, and surpassed the US$1,032.70 mark set in March.

'The renewed bout of dollar weakness on talk of oil being priced in a basket of currencies, including gold, has driven prices up, but it is interesting to note that gold in euro dollar terms has also gained, indicating interest aside from just dollar weakness,' said Barclays analyst Yu Yingxi.

'Recent news about a large producer de-hedging and positive technical factors have also helped boost investor sentiment, with speculative net long exposure to gold near record high levels and continued inflows into exchange-traded products,' she added.

In Singapore, the SPDR Gold Trust, an exchange traded fund (ETF), shot up to a day high of US$102.75 - up 2.75 per cent from Tuesday's close - before retreating by evening.

On Tuesday, the US dollar slumped against the major currencies after a newspaper report said Arab states had launched secret talks with China and Russia to drop the use of greenback in oil trading and switch to a basket of currencies instead.

Selling on the greenback continued in yesterday's trading that saw the Sing dollar move to $1.3995, from $1.4027 a day earlier. The Japanese yen strengthened to 88.16 from 89.105 on Tuesday.

Gold, which typically moves inversely to the dollar, rose sharply higher and has chalked up a more than 18 per cent gain since the beginning of the year.

But while the precious metal hit a fresh record in US dollar terms, it remains more than 30 per cent below its highs in Aussie dollar terms, 15 per cent below its highs in Japanese yen terms and 6 per cent below its highs in sterling terms, notes CMC Markets strategist Ashraf Laidi. He predicts that any retreat in gold prices will 'have to emerge on a risk aversion during earnings season'.

Barclays' Ms Yu said that 'the high level of speculative length suggests a certain risk of liquidation in the near term, but we expect the overall trend to remain bullish'.

'External factors are likely to continue to point to a bullish case for gold, with our expectations for further dollar weakness over the medium term and for inflationary concerns to creep back onto investors' radar screens as oil prices rise,' she added.

The run-up in gold has been largely driven by weakness in the US dollar, which makes dollar-priced commodities cheaper for holders of stronger currencies, boosting demand.

'Also, people expect further dollar weakness, and gold is a good hedge against that,' said Albert Cheng, who heads the World Gold Council's Far East office. He sees firm demand from the jewellery segment - which accounts for over half of total interest - and investment in gold ETFs.

Citi's metals trader Valerie Chan believes the rally is sustainable, but added that 'gold tends to consolidate for a period after super strong rallies before it continues its upward move'.

'We think US$1,100 before the end of this year is a good possibility but it may take a series of big up-and-down moves before getting there.'

'The appeal of gold as a store of wealth increases during difficult economic times,' said Merrill Lynch analysts, adding that the flood of liquidity 'reduces the costs for investors to fund their positions and assets like gold generally benefit from this'.

The metal along with other commodities also gains support from fears about higher inflation because the metal is widely regarded by investors as a safe store of value.

In the silver market, a sharper rise in prices than gold's over the past one year has sparked demand for the metal and could make it an additional item on investment portfolios. Silver jumped more than half over the past 12 months to US$17.3 an ounce, compared with gold's 17.5 per cent rise over the same period.

Copper futures on Wednesday gained up to 0.14 per cent on the Multi Commodity Exchange while prices at the London Mercantile Exchange rose 2.79 per cent to US$6,085 per tonne in the previous session.

Oil prices also rallied, to stand up one per cent at US$71.45 a barrel, supported by the weak US dollar, which hovered around US$1.47 versus the euro.

Market watchers observed that China, which has 1.9 per cent of its reserves in gold (1,054 tonnes) may decide to increase it to 10 per cent, and that would mean that it buys at least 5,000 tonnes of gold from the world markets.

The East Asian giant, now the sixth largest holder of gold reserves in the world, and others such as Russia and Philippines, may look to raise their gold holdings as well, said Mr Cheng.

Presently, the United States and Germany occupy the top two positions, holding 77.4 per cent (8,133.5 tonnes) and 69.2 per cent (3,408.3 tonnes) of gold respectively in their reserves. Italy and France hold 66.6 per cent and 70.6 per cent of their reserves respectively in the precious yellow metal.