Sovereign risks mean gold retains some of its sparkle

HAD you bought gold back in 2000, you would have paid around just under $300 an ounce. Even taking into account the effect of inflation, this seems an absolute bargain compared to the current price of $1,138. But this decade-long bull run in gold may be coming to an end, says Philip Klapwijk, chairman of independent precious metals consultancy GFMS, which released its 2010 Gold Survey earlier this week.

In his opinion, there is no immediate reason for fresh investment to flood in to gold because the financial conditions necessary to produce dramatically higher prices are no longer as likely to occur.

He says that the record high in December of $1,217 was because of strong investment demand against a backdrop of a falling dollar, fears of further quantitative easing and counterparty risk. But he expects the importance of these drivers to wane over the coming year or so, which should see the precious metal struggle to make gains beyond $1,300.

But in the near-term, spread betters could take a punt on a rise in gold prices. As an indication of sustained investor demand for the precious metal, world gold ETF holdings reached an all-time high of £68bn last week as the gold price hit new highs in both euros and sterling – €860 and £754 an ounce respectively.

With sovereign risks undeniably present and fears of US dollar weakness in the second quarter, investors are preferring to hold gold because it is a safe-haven.

Indeed, the latest dip was met with renewed buying appetite thanks in part to China’s strong GDP growth figures, says Simon Denham, managing director at spread betting-provider Capital Spreads.

At the moment the key levels to the upside are at $1,170 and $1,184. Denham adds: “Any further strong economic numbers, particularly from the big emerging economies, could help to support gold and bulls will be eyeing another run at $1,200 at some point this year.”

South Korea will be reporting its first quarter GDP figures this week and the Malaysian Institute of Economic Research predicts that Malaysia may grow more than previously forecast this year in spite of an appreciating currency and a rise in interest rates. Malaysia will publish first quarter GDP next month.

The recent burst in the gold price has been met with a mixed reaction in the physical markets. Asian jewellery demand has dwindled slightly as the Chinese New Year celebrations came to an end and the Indian wedding season drew to a close.

However, Societe Generale’s commodity analysts say that there is a long-term endemic bullishness about gold in India and there are also rising concerns about inflation in China. Therefore, they are still expecting gold to rise even further, forecasting a $1,400 average for 2011.

While the exponential rise that we have seen in gold over the past year may be starting to run out of steam, spread betters trading on leverage can make the most of what upside there is left in the precious metal.