Gold: The Elusive Metal
After a strong rally in 2007 and the first half of 2008, gold is now trading down from its peak, and in a volatile fashion. The question on everyone’s mind is whether or not gold is a good investment for 2009. This is a tricky forecast, as gold continues to be buffeted by multiple dynamics. Many analysts’ estimates are completely at odds with one another, illustrating the range of views.
In 2007 and early 2008, conditions were ripe for an increase in gold prices. The US dollar was weakening, higher energy and food prices were feeding their way through to inflation, and more importantly, inflation expectations and a rise in volatility, prompted investors to move into safe haven assets such as US Treasuries and gold.
Currently, the economic landscape is more challenging. Fears of inflation have turned into fears of deflation, while the US dollar has been on a strengthening trajectory since the summer. Volatility – although considerably lower than the levels reached in October – still remains high by historical standards, and another wave of bank or corporate failures could result in another spike in both volatility and gold prices. Furthermore, longer-term currency and inflation risks are mounting on the back of countries’ willingness to jump on the Zero Interest Rate Policies (ZIRP) bandwagon in order to tackle the economic downturn.
Gold Prices, US/oz
So what’s the verdict? Well, I expect gold to remain volatile over the coming months, trading within the US$800-900/oz range. However, a break above key support or resistance levels would certainly help identify the longer term trend direction. I also think that relative value plays could be interesting. The Dow/Gold ratio has been declining for several years and I think that this trend will continue as gold outperforms the Dow Jones.