Why Gold’s Difficult to Ignore

“The Financial World According to Inya” Column,
by Inya Ivkovic, MA

Gold has become increasingly difficult to ignore these days, what with hitting a record high yesterday of $1,120 an ounce. At the same time, the U.S. dollar plunged to its 15-month low. Surprising no one, U.S. economic recovery remains inconsistent at best and, in all likelihood, provides for a good reason to keep key interest rates low
for the near future.

Of course, such an erratic economic landscape provides adequate nourishment for commodities; particularly gold, which is now expected to post further gains, and not only because gold bugs have said so. The gold rally that commenced last week was not driven only by the weakening dollar, but also by other fundamental factors, such as the International Monetary Fund (IMF) selling about 200 tons of bullion to India’s central bank. The first and most obvious result has been the prospect of materially increasing buying pressures in the sector.

Senior manager at Saxo Bank, Ole Hansen, summed it up by saying, “The way gold keeps accelerating away from its previous highs is quite incredible. Continued momentum is driving prices higher. Whenever we see new highs, we see more momentum buying.”

The greenback is in pain, clearly, particularly after a bunch of the Fed’s talking heads commented that high unemployment rates and vanishing consumer spending are weighing down heavily on the U.S. economic recovery (duh!). Granted, the greenback’s pain is the main trigger for gold’s day-to-day rallies. However, in terms of the longer-term trend, other bullish factors impacting gold may emerge.

Aside from the IMF’s sale of gold, there are other central banks hoarding gold into their treasuries. For example, Vietnam’s central bank has lifted its ban on gold imports (in place since May last year) after seeing the bullion gain so much in a relatively short period of time. Note that Asian traders have largely ignored gold in the past year or so, putting downward pressures on the physical demand in the process, largely keeping to the sidelines even after prices started surging towards the psychological $1,000 mark. That may change in the coming weeks and Asia may open up again as a source of demand for gold.

Additionally, trading in gold exchange-traded funds (ETFs) remained sluggish during the same period, as evidenced by the unchanged holdings of the largest gold-backed ETF, the SPDR Gold Trust. However, as the dollar’s spiraling down the toilet continues, interest in gold has gained new momentum and, with central banks buying bullion, the future outlook for gold prices remains very positive.

We have heard of gold price expectations ranging from $1,200 per ounce to $1,500 per ounce in 2010, expressed by some of the Street’s more respected fundamental and technical analysts. I personally lean towards the higher end of that range in the months to come and am even more bullish on gold stocks, the cheaper alternative to increase one’s portfolio’s exposure to gold bullion.