Gold prices set to hit $2,500/oz as buying season kicks in

September 1, 2011

Beginning with Eid, gold buying to heat up with Indian wedding season, Diwali, Christmas and Chinese New Year

The price of gold, the ‘safe haven’ commodity, is expected to continue its new rally in the forthcoming months as the gold buying season kicked in on Tuesday with the first day of Eid – a traditionally strong period of gold sale in the Middle East.
Closing at $1,791 per ounce on Monday, the first day of Eid saw gold price jumping more than 2 per cent, or $38, to $1,827on Tuesday, followed by another rise on Wdnesday, and was trading at $1,837/oz at 12 noon UAE time. Spot gold held steady on Thursday with little change at $1,824.39 an ounce.

This rise is despite a massive increase in margin requirements to trade gold announced last week by the CME Group Inc., the parent company of the main metals and energy exchanges in the US. It raised the amount of money needed to trade gold contracts by 27 per cent to $9,450 per100-ounce contract.

Experts believe that this latest rally will defy the hike in margin requirements and propel gold prices beyond the$2,000-mark in the coming months. In fact, some experts are calling for double of that level.

According to Steen Jakobsen, Chief Economist from Saxo Bank, gold still has a long run ahead. “Looking at how precious metals will react to a new QE (quantitative easing), the answer is simple. I think we will see $3,000 if not $4,000 for gold, and other metals should follow suit.”

Gold’s latest upward journey has already begun with Eid, and gold buffs maintain that it will continue until the Chinese New Year with significant gold buying happening during Diwali, Christmas, and the Indian wedding season.

However, downward risks remain, say experts. “As with the dollar, if this is the ‘end game’ then the spike will be followed by risk-aversion which could overall curtail the highs. At all times, one has to realise this is close to the end of the trend, and for every $100gold rises, the risk increases disproportionately as there is more and more speculative hangover involved,” added Jakobsen.

M.R. Raghu, Senior Vice-President-Research at Kuwait Financial Centre (Markaz), believes that some moderation is likely. “Gold has performed 33 per cent for the year out of which 13 per cent was post the US downgrade (August 5). Obviously, the run up is too fast and hence some moderation is bound to happen at this level,” he told Emirates 24/7.

“For investors that entered the party early on, it may be a good idea to cash out partly at these levels. From here, the price may correct, say 5 to 10 per cent, before resuming another go. Hence, I would not advise investors a total exit from gold since the macro picture is negative, which is kind of positive for gold at least for some time to come. It may find it difficult to hit $2,000 [per ounce], but once it does, you can see more buying coming in,” he said.

Advocates of gold affirm that gold remains the world’s go-to currency. Commodities analysts at Standard Bank said recently that after touching record levels, gold came off its highs a few days back, as risk aversion subsided. “Equities across the globe rebounded as investors shrugged off the pessimism of the past few days and moved into riskier assets, amid growing concern that the bullion rally was overdone and hopes of further Fed monetary stimulus. However, this was short-lived, as risk aversion was soon apparent, as Asian markets opened. Moody’s downgrade of Japan’s sovereign credit rating reignited concerns over the developed world’s fiscal problems, sending Asian equities into the red, to the benefit of safe-haven precious metals,” said a recent report released by the bank.

“[A] drop in prices has attracted an element of bargain hunting, which should provide support across the precious metals complex in today’s trade. However, with European stocks currently trading up it appears as if risk appetite is not completely absent, which could limit the upside for precious metals,” it added.

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