Gold rally intact, despite sell-off
A brutal sell-off in gold from record highs above $1,000 an ounce last month has failed to deter market bulls who believe turbulence in financial markets will keep attention firmly on bullion this year
Atul Prakash - Analysis
07 Apr 2008 13:14
LONDON (Reuters) - A brutal sell-off in gold from record highs above $1,000 an ounce last month has failed to deter market bulls who believe turbulence in financial markets will keep attention firmly on bullion this year.
Gold has slipped 13 percent since March 17 when it hit an all-time high of $1,030.80, after spiking 60 percent in just seven months. Gold <XAU=> was quoted at $905.80/906.40 at 1100 GMT on Friday, against $903.40/904.20 in New York on Thursday.
But analysts say the factors that powered the rally are still intact and bullion should hit new peaks this year.
Despite a recent recovery in the dollar, the U.S. currency will struggle to find solid ground in the long term, the Federal Reserve will cut rates again and the crisis in the financial markets will keep many investors focused on gold, they say.
"We are in a bull market because of further easing of global monetary policy, a financial crisis that doesn't want to go away and the Fed has taken unprecedented steps but it hasn't yet eased counter-party fears," said Caesar Bryan, portfolio manager of the $670-million GAMCO Gold Fund in New York.
"This should bode well for gold."
A weaker dollar makes gold cheaper for holders of other currencies and often lifts bullion demand. Investors also look for alternative assets such as commodities to park their money in the event of a falling U.S. currency.
SMALL INVESTORS
Other factors support bullion.
Strong oil prices and lower U.S. interest rates lift gold's appeal as an inflation hedge, while strong returns in the past years have attracted retail bullion investors.
At the last month's peak, gold was up more than 20 percent since the start of 2008 and has doubled from its level two years ago. It surged 32 percent in 2007 and spiked four times since a low of around $250 in August 1999.
Convenient methods of investing in gold, such as exchange traded funds, have opened the market to small investors, while gold producers' move to gradually close their hedging positions -- commitments to sell in future -- have also supported prices.
"We believe weakness in the U.S. dollar has not been exhausted and, with U.S. real interest rates expected to move deeper into negative territory, we are maintaining our bullish outlook towards gold," said Michael Lewis, global head of commodities research at Deutsche Bank.
The dollar gained this week on better-than-expected U.S. data, but has slipped nearly 15 percent over the last 12 months to a record low against the euro. The decline is likely to continue, most analysts say.
BULL TREND INTACT
The U.S. economy has been battered by a collapse in the housing market and a banking sector severely wounded by the credit crunch, prompting fears of a full-blown recession.
This has caused the Fed to pump liquidity into the market and slash rates by 300 basis points since September, undermining the yield appeal of the greenback and prompting heavy selling.
"Gold will pick up again because I don't think the dollar is going to be capable of staging a consistent rally here," said Bill O'Neill, managing partner of LOGIC Advisors.
Despite gold's bullish outlook in the long-term, analysts said it may struggle in the near term after its recent sell-off.
"You could still argue that the longer-term trend is intact, but from a technical perspective, it's looking much less healthy now than it was a while ago," said Tom Kendall, precious metals strategist at Mitsubishi Corp.
"The U.S. economy is by no means out of the woods, inflation is still a very big concern and those things are positive for gold. But it is going to take a while for the market to recover from this current sell-off."
Peter Hillyard, head of metals trading at ANZ Investment Bank, said the recent sell-off had not damaged the bull trend:
"And a knock back could be healthy for the market. It will give time to calm down, take some heat out of the market, and may be the next move up will be more sustainable."
(Additional reporting by Frank Tang in New York)
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