By Shashank Mishra
NEW DELHI: Commodity prices have been crushed by economic slowdown but gold is still sitting pretty. On Monday it rose to a 2-month high of $920 per ounce as investors flocked to the age-old safe haven amidst turmoil in US and European financial markets.
The rejection by US law makers of a $700 billion rescue package for financial firms had hit both equity and commodity markets hard in recent days.
Over the longer term, studies show the relationship between commodity and equity prices is weak. But these are exceptional times, likened by some to the depression in the United States between 1929 and 1933 when the economy shrank by more than 30%.
Meanwhile, analysts are divided on the long term prospects of gold. For example, Salman Partners on Tuesday had revised their gold price estimate from $937 per ounce to $897 per ounce for gold in 2008 while its forecast for gold in 2009 has been downwarded to $950 from $1,025. Although other analysts are quite bullish on gold’s prospects in 2009.
Investors are looking at gold to moderate some of the risks in their portfolio. They are concerned mainly about counterparty risk, market risk and liquidity risk. Although gold does not necessarily remove the counterparty risk but negative real yields—the difference between interest rates and inflation—are also another reason to hold gold.
As far as silver is concerned, Salman Partners has predicted the full year average silver price down from $17.95 per ounce to $15.70/oz. Silver will gain strength from the current levels in 2009 when it could hover around US$14 per ounce and an average silver price of US $15.75.
Gold has so far been immune to the financial crisis except when dollar strengthened which made investments in gold less attractive. Gold hit a record high of $1,030.80 an ounce on March 17 and slipped to below $740 on Sept. 11 as the dollar rose and inflation worries receded.
One of the reasons behind the commodity prices surge in recent times has been the fall in value of dollar which made commodities priced in U S currency cheaper for holders of other currencies. But the dollar has staged a recovery as currency markets realized banking sector problems were contagious and would not be confined to the United States.
Meanwhile, Financial Times has reported that investors in gold are demanding “unprecedented” amounts of bullion bars and coins and moving them into their own vaults as fears about the health of the global financial system deepen.
It quoted Jeremy Charles, London Bullion Market Association (LBMA) Chairman,as saying that the demand was unprecedented and that refineries were unable to supply the required bars. Investors in some countries were paying a premium of $25 per ounce over London spot price to secure those scarce bars.
