Gold moved above $700 an ounce on Sept. 6 for the first time in 16 months as investors bought up the metal for both its practical uses and its symbolic importance in uncertain times. In New York, December gold futures rose $13.90, or 2%, to close at $704.60. And shares of companies that mine the shiny stuff also benefited. The S&P Gold index gained 4.68% on Sept. 6, paced by major players Barrick Resources (ABX), which soared 8.4%, and Newmont Mining (NEM), which gained 4.3%. “This is a perfect storm for gold,” says Joe Foster, portfolio manager of the Van Eck International Investors Gold Fund.
Gold is often seen as a safe haven for nervous investors. That makes it a popular place to park money in the midst of a global financial crisis. However, when worries about a world credit crunch hit financial markets this summer, gold prices actually fell. Market experts suspect that panicked investors, suffering from losses on toxic mortgage debt, were selling their gold to raise cash. Now, however, much of the panic has subsided while long-term worries about credit markets and the US economy remain. “Now that the forced selling is over, we’re seeing investments allowed to perform based on fundamentals,” Foster says.
Many Asian nations stung by subprime investments are saying “We need to diversify more in gold,” says Frank Holmes, chief executive and chief investment officer of US Global Investors (GROW), an expert on commodities and emerging markets. In the past several years, the price of many commodities has spiked, driven by demand from manufacturing in emerging economies like China. Gold prices have lagged other commodities, however, because gold has fewer practical applications. If gold had followed other commodity price increases, it would be priced at $900 to $1,000 per ounce, Holmes says.
“You’re better off thinking of gold as a currency than a commodity,” Foster says. Thus, much of gold’s moves up and down can be explained by global financial movements. It often rises alongside the price of oil, and falls when the US dollar rises. The fact that oil prices rose and the dollar fell Thursday helped drive the day’s big move, Holmes says. Nonetheless, at least some of investors’ enthusiasm for gold can be explained by supply and demand for gold as a raw material.
Gold’s main practical application is jewelry. In many countries, including India, gold jewelry is sought after as a replacement for paper wealth. Many of the countries with a strong cultural affinity for gold also have booming economies and growing middle classes. Holmes says gold prices often are lower in August before spiking in September. The reason is that, as autumn begins, jewelers start buying up gold to sell during a series of holidays and festivals later in the year. India, a big gold buyer, has its big Diwali festival in early November and the coming months are also a popular time for weddings. In the Middle East, gift-giving at the end of Ramadan should drive gold demand. Christmas and the Chinese New Year are also factors.
So far this year, demand for gold from China, India and the Middle East has been strong, Foster says. And now that summer is over, Foster says, we’re “trending into the strongest season for gold.”
So demand for gold jewelry may be moving higher, but what about supply?
Foster says the supply of gold from mines has been sliding lower. With global financial uncertainty and a supply-demand equation like this, Foster says, “My outlook now [for gold] is as bullish as it’s ever been.” (businessweek.com)
