Last year, while most commodities prices were hurriedly undoing five-years of gains, gold closed the year up 4% at $869.75 per ounce—not an outstanding performance in its own right but against the backdrop of a global economic downturn the only metal to have gained over the year surely deserves a little applause.
Having set a record high back in March 2008 of $1,023.50 per ounce—and subsequently falling to a year low around $700 as the full impact of the credit crunch was realized—gold once again breached the $900/ounce mark this week.
The precious metal, which is seen as an alternative investment to stocks and bonds and is often deemed by investors to be a safe haven in times of economic decline or in the face of inflation, was trading back at $889.40 at midday today as sentiment surrounding the banks improved, attracting buyers into the sector. Metals consultancy GFMS expects gold prices to range between $750/oz and $1,080/oz in 2009.
But Citigroup Foreign Exchange recently published a note in which the analysts said they continue to remain unequivocally bullish on the medium- to long-term view on gold and believe that, ultimately, prices in excess of $2,000/oz are possible.
Citi analysts said they see the gold price being fuelled either by investors trading in the commodity as a safe haven to the ongoing financial and economic turmoil, or by the liquidity injections by governments around the world bringing reflation and subsequently inflation. While Citi’s view is at the top end of analyst expectations, industry experts tend to agree that a financial crisis is good for the gold price. They’re not so sure about the impact of an economic crisis, however.
“Given the economic situation it is no wonder that gold is the most favoured commodity in most 2009 forecasts,” analysts at Fortis Bank wrote in a recent sector note. “But while we see it benefiting from financial market troubles we are not so sure about deflation, and prices could trend lower for a while if the economic crisis edges out the financial one in investors’ minds.”
HSBC analysts appear to agree with Fortis and are certainly not as bullish as Citi: “A return of the banking crisis saw [gold] make substantial gains in the face of a stronger dollar. Such a crisis is good for gold, we’re not so sure about an economic crisis, and as such we’re quite bearish on gold as deflation tightens its grip.”
Looking to the future of the gold industry’s players, Fortis believes that the established players such as BHP Billiton, Grupo Mexico, Vale, as well as state-owned or controlled entities such as Codelco, will “hunker down and should survive the global downturn.”
Despite the diversion in analysts’ price forecasts, there does appear to be a consensus of opinion in that stocks and bonds perform best in a stable political climate with strong property rights and little turmoil while gold, despite being a different asset class, revels in uncertain times. Risk aversion and the desire to preserve wealth has seen investors reaching for the bullion in recent months, but sentiment surrounding the financial sector appears to have switched this week prompting investors to turn their attention back to bargain-hunting elsewhere.
In mid-session deals, the FTSE 100 index was over 2% higher, up 84.64 points at 4,279.05, fuelled by banking sector gains. Shares in mining industry players were generally lower, meanwhile, amid concerns over the raising of capital and the impact on earnings of last year’s price falls. Xstrata, a major global diversified mining group with exposure to gold, topped the casualty list with an 8% fall to 628.5p. Conversely, BHP Billiton, which mines gold in Western Australia, was almost 2% ahead at 1,286.0p.
