Posted - 03/04/2011 : 12:29:16
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Gold 'vulnerable' to world economic recovery
By Harry Glass and Reuters
4 March 2011, 12:59pm
Gold prices could slide as the world economy recovers and global interest rates rise, a leading commodities fund manager has warned.
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And if tensions in the Middle East dissipate, this could also put downward pressure on the precious metal, a traditional safe haven for investors in times of trouble.
Ben Ross, GE Asset Management's portfolio manager for commodities, also told Reuters that platinum and palladium may turn out to be better bets.
He made the predicition despite the gold price recovering from its New Year slump to hit a new record above $1,440 this week. This morning it was holding at $1,416.30 an ounce.
'Gold could continue to go higher if geopolitical risks remain, but longer term, on a 12-18 month time horizon, should calm be restored in the Middle East, should European sovereign debt situation stabilise and the economy continue to recover, then I think gold will trade lower,' Ross said.
Record-low interest rates since the start of the financial crisis have benefited gold prices, as low rates cut the cost of holding non-yielding assets like bullion. As soon as the European Central Bank hinted this week that an interest rate rise in the eurozone may be imminent, prices retreated.
Ross said he sees 'a good probability' that the US Federal Reserve will raise its rates in the next 12-18 months too.
'When they do that, it could perhaps be the catalyst that takes a lot of this investment money out of gold,' he said.
Higher rates would put a downard pressure on inflation. The metal usually holds its value when prices are rising so a slowing of inflation further threatens prices.
'I am more in the camp of hedging inflation with a broader basket of commodities, rather than just gold,' said Ross. This too may apply to hedging against geopolitical risk, he added.
'When I look at the Middle East and what is happening there, I think, what would I rather hold - gold, or something that is impacted from a supply standpoint, like oil, or petroleum products?' he said.
Ross said GE Asset Management's commodities fund plans to maintain its current positioning on precious metals, with a stronger allocation to platinum and palladium.
The platinum group metals, whose heavy exposure to the car market makes them sensitive to the economic cycle, have been widely tipped to rise this year.
'(We are) more bullish on palladium and platinum,' he said. 'Given some of their very strong demand fundamentals and very big supply constraints, we find those more attractive than the other precious metals.'
He was less impressed by silver, however.
Although it was one of the best performing precious metals last year, posting gains of 83%, and has hit 31-year highs this week near $35 an ounce, its volatility tends to make it unpopular with longer-term investors.
Others are more bullish...
The fact remains, nobody is sure where the gold price is headed.
Dominic Frisby, commodities commentator on MoneyWeek, thinks the precious metal is on an excellent trajectory. It's one which it has held for a while, and he expects it to continue to.
He predicts it could break the $1,500 mark within three months: 'Mid-March to the end of May is often a strong time of year for gold.'
And precisely because many are starting to doubt gold - 'even in the face of runaway inflation' - it could even reach $1,650 before year's end.
James Steel, precious metals strategist at HSBC, was quoted on the FT website saying: 'The buying [of precious metals] has accelerated, both institutional and individual.'
Political uncertainty in the Middle East was certainly driving investors back to precious metals, according to traders.
But Steel continued: 'The geopolitical thermostat has not fallen. The situation in Libya really is almost the worst of all worlds for markets because there's no clear winner.'
The jump in oil prices – up $20 since January – raised concerns of rising inflation, again increasing demand for gold as a means of wealth preservation.
The FT's investment editor James Mackintosh points out some 'gold bug' analysts believe the price is due a fall having 'triple topped' between November and January - that is, the price peaked three times in succession.
The crossing over of the 30-day and 50-day moving averages also suggests that prices have further to fall...but a belief that the 200-day average props up the price suggests there could be further rises.
Of course, charts and averages have misled people plenty of times before.
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