No mellow times for yellow metal

Dubai: Like most commodities, the price of gold appears to have seasonal swings, and it is in the middle of a massive uptick even as you read this.

Data collated by Richcomm Global Services DMCC indicates that in the past nine years, while gold has witnessed an annual rise in price, the third quarter has provided the maximum momentum.

"The seasonal weakness regarding gold should soon be over," said Eugen Weinberg, Commerzbank analyst. "We expect prices of gold to rise again in the medium term."

Festival impetus

Providing the impetus will once again be Indian festival-related buying, with Dussehra and Diwali occurring within the next four to five months.

"Throughout the past nine years starting from 2001, July-August has most often served as the best time to buy gold for an average rise of 15 to 20 per cent in absolute price terms during the following three to four months," said Richcomm's vice-president Pradeep Unni.

He points out that this trend has faltered only once, in 2008, when the price of gold fell quite spectacularly in the second quarter.

"This was because of a global equity market recovery in that period" when traders believed the preceding market fall had been overdone in the wake of the credit crisis, he said.

The explosion in inter-bank interest rates in 2007 following the downgrading of collateralised debt obligations set the stage for the first big leg up in gold prices in the last few years.

As investors realised that financial markets had created a gross misallocation of capital by lending money to companies and individuals that could not honour their commitments, gold demand surged. Gold prices crossed $1,000 per ounce as Bear Sterns was taken over by JP Morgan in 2008. The collapse of Lehman Brothers forced many investors to sell their gold to move into cash. But the drop in gold prices did not last long.

They rallied firmly again in 2009 as the market became concerned about US dollar weakness, and again in 2010 as it became the euro's turn to weaken dramatically as rising debt levels brought European economies to their knees.

The Reserve Bank of India was one of the first to express these concerns by purchasing 200 tonnes of gold from the International Monetary Fund as part of its foreign exchange reserve programme.

As other investors questioned the sustainability of the debt in Greece and other southern European nations, gold prices continued to move higher, reaching $1,265 (Dh4,647) per ounce in May. More importantly, gold denominated in euro moved from 735 euros to the ounce to 1,040 in just six months.

"In recent weeks, as confidence on the European currency has improved, gold prices have fallen," Merrill Lynch's Francisco Blanch said.

"But renewed economic weakness in the United States is once again helping gold make a comeback,"

‘Cyclical pressures'

"As policy measures help create an upswing in economic activity over the next two years, cyclical pressures will come back into the system, likely resulting in a lot more money chasing the same oil barrels.

"Here is where we continue to see a third stage of gold price appreciation where the metal moves up on the back of higher oil and commodity prices… ultimately pushing gold to $1,500 per ounce," Blanch said.

"While a clear case is to be made for higher gold prices, our view is not without risk," he warned.

"Should a consensus emerge in Washington on the need to tackle the [$1.4 trillion] deficit or should US GDP growth surprise to the upside, gold prices could fall.

Equally, an increasingly stable and more certain global economic environment could prove negative for gold."