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Gold appeals after bailout blow but for how long?

Gold is likely to be a rare star in the dimming financial firmament, attracting investors anxious to protect their portfolios from the crisis in equities and other assets.

 

Gold surged 5% on Monday, after US lawmakers rejected a $700 billion plan to lance the toxic debt boil, sending other markets including oil and US equities reeling. The current market strife is a breeding ground for gold bugs -- investors fascinated by the precious metal -- but analysts caution that gold could lose its traditional safe-haven appeal if the US manages to pull together a financial markets rescue package.

“This market looks like a paradise for gold bugs, but you need to be careful. In the next three or four weeks, weak equity markets will drive safe-haven activity, but it could pass quickly,” ANZ’s senior commodities analyst Mark Pervan said. He added gold could challenge a record high of $1,030.80 struck in March.

Spot gold drifted lower to $900.90, down 0.3% at 0410 GMT.

Commodities had been star performers this year but spot gold, up 8% since January, ranks as one of the few that has managed to hold onto some of the gains as worries about sliding demand drag on everything from industrial metals to palm oil.

Gold’s sudden popularity is clear -- holdings by the New York’s SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, jumped by around 30 tons on Monday, the second-biggest one-day rise ever, an industry source said. Total holdings jumped to over 750 tons -- about a third of global gold mine output -- and have climbed around 130 tons since mid-month.

“As long as this uncertainty in financial market continues, it will provide strong support for gold, while the long-term implications of the bailout should weaken the dollar,” said Toby Hassall, analyst at Commodity Warrants Australia. “Currencies are going to be volatile and some people will think holding gold is a better alternative than paper currency.” The dollar hit a four-month low against the yen, but the euro and sterling suffered as banks in Europe fell prey to the crisis.

 

GOLD ABOVE $1,000

“The gold market is telling us that the world economy is in peril,” said Jeffrey Nichols, managing director of American Precious Metals Advisors. “In the short run, any meaningful policy response that reduces fear and anxiety could trigger a correction in gold -- but, longer term, whatever happens, gold is almost certainly moving higher,” he said. He added bullion could break the $1,000 an ounce level and set new highs within the next few months. That compares with the outlook for industrial raw materials and oil, which are likely to come under more pressure from declining demand growth as the world economy slows.

This week, Citigroup pared its commodity outlook by broadly 20% for the next couple of years. Its base case scenario called for copper prices to average above $8,000 next year, up by almost 30% from current levels around $6,230. But it added that if global growth continues to slow and demand withers, prices could fall to below $4,400 a ton. Deutsche Bank said on Monday it has lowered its forecast for US crude oil prices to an average $92.50 a barrel in 2009 due to weakening demand. Deutsche Bank’s previous forecast for US crude was $120 for 2009.

Even bullion, one of the safest of safe havens in times of turmoil, carries with it risks, especially if the dollar firms and oil prices continue to weaken. In more settled conditions, falling oil prices and a stronger dollar depress gold, weakening its appeal as an inflation hedge and making it more expensive for holders of other currencies.

“We look like we are on our way to $1,000 now, the question is what happens if a bailout package is approved,” said Jonathan Barratt of Commodity Broking Services, “The gold market thinks we have big problems ahead and I can understand this flight to quality, But I question whether it’s sustainable. Should we get bullish on gold when the US is throwing $1.3 trillion to try to solve the problem.” (Reuters)