Inflation fears may push gold back to $1,000/oz

MNB

Gold is poised to climb back above $1,000 per ounce this year, as inflationary pressures and financial turmoil prompt investors to seek shelter in the metal used as a store of value.

But the caveat is gold's fortunes are traditionally strongly tied to the movement of the dollar and significant turnaround in the weak US currency could limit its rally.

“There's a good chance that it may go back above $1,000 in the short- to medium-term,” said Richard Davis, a London-based fund manager at BlackRock.

Record high oil prices, a soft dollar and turbulence in the banking sector sparked by the credit crunch pushed gold to a record high of $1,030.80 per ounce on March 17.

Since then the metal has lost around 15%.

However inflationary pressures highlighted recently by the US Federal Reserve and European Central Bank will aid gold.

“We're headed for inflationary times and gold has always been a safe asset to protect your wealth against inflation.”

With oil prices at a record high above $135 per barrel and food prices surging to their peaks, fears of inflation is haunting investors more than ever.

US Federal Reserve Chairman Ben Bernanke said on Monday the latest surge in energy prices is adding to the dangers from inflation but the central bank would strongly resist rising inflationary expectations.

His strong tone convinced more investors that rate hikes could come this year and triggered a rally in the dollar, which took the steam out of gold, as the two tend to move in opposite directions.

Some fund managers still betting on a weak dollar say there could be further fallouts from the credit crisis, which would make investors rush back to gold.

“We might have aftershocks or maybe another major 8.0 Richter scale kind of event lies ahead and that's the sort of thing that tends to make people nervous,” said John Hathaway, senior managing director of Tocqueville Asset Management.

Hathaway said gold serves as an alternative financial asset particularly when markets worry about banking issues or currencies. “I think we will see gold going above those record high levels again and that will probably be this year.”

However, some analysts disagree, citing poor physical demand, weaker gold dehedging and possible strengthening of the dollar in the longer term.

“Anecdotal evidence in the current quarter so far suggests that the decline in demand has continued,” said metals analyst Stephen Briggs at Societe Generale.

The Indian market, accounting for 20% of world demand, is likely to remain sluggish, Briggs said. “Gold at the moment just doesn't seem to have the momentum to do it.”

“I'm sure $1,000 is possible but we need to be getting into new territory on the dollar and we're not,” Briggs added. His comments were echoed by fellow analysts.

US investment bank Goldman Sachs economists expect the dollar to remain weak, but they expect that over a 12-month period it will begin to strengthen as the US economy recovers.

On the back of that, Goldman Sachs said it lowered its 3-, 6- and 12-month forward price forecasts for gold to $860, $840 and $800 an ounce respectively.

Record high oil prices, which boosted gold this year, could continue to offer support, as they highlight the dangers of inflation and put pressure on global economies.

“If (high) oil slows the economy to the point where we are in a low interest rate environment for the dollar, that could be good for gold,” said Michael Lewis, global head of commodities at Deutsche Bank. (Reuters)

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