Gold set to outperform other asset categories

After being a safe-haven for investors in 2008, gold is expected to outperform all asset classes this year and to surpass $850 per ounce by the second quarter.

Analysts at The National Commercial Bank (NCB) Economics Department believe that price of gold will rise despite the financial trouble. "Gold prices increased by around six per cent in 2008, despite the financial turmoil that triggered a large sell-off in global commodity and equity markets," they said.

Gold rose the most in five weeks to $841.9 an ounce last week, which is 1.3 per cent higher than its price it started with last year.

However, a strong dollar and falling inflation expectations may well be weighing down on prices over the short-run. Nevertheless, gold prices will increase in the long run, say experts.

They believe that the outlook for 2009 is positive. Low interest rates and the increase in government debt, namely the US, should lead to an increase in inflation expectations in 2009.

Manqoba Madinane, expert at Standard Bank in South Africa, believes gold is set to benefit in both situations – deflation or inflation.

"I believe the current economic gloom in the US, Eurozone and Japan coupled with plummeting oil prices point to higher risks of global deflation. Global deflation leads to asset decline, increasing risks of default on debt instruments and other leveraged positions by investors. This should increase the demand of safe-haven assets – gold, therefore, stands to benefit from increased fund flows from this," he told Emirates Business.

"Further, if global growth recovers during the course of the year and inflation follows deflation, gold still stands to benefit from this as gold is seen as an inflation-hedge asset by some investors in the short-term," he added.

Madinane said gold mining stocks will also be a good choice for investors as resources stocks are expected to outperform other equities. "Given the expected strong gold price performance, I would expect a strong performance from gold stocks especially given how hard resource stocks have plunged."

A fluctuating dollar also influences gold price in a big way. "The greenback has come under pressure in line with a reduction in investor risk aversion recently. However, the risk of global deflation could increase the likelihood of a rebound, to the upside, in risk aversion – possibly leading to dollar appreciation on a six-month horizon (as investors run to the safety of US treasuries). In the long run, we believe risk aversion will ease as global economic growth recovers – this could weigh on the dollar. Precious metals, gold in particular, have grown increasingly sensitive to the greenback's movement and we don't anticipate a change in this condition," said Madinane.

The limited supply of gold will also lead to a price increase. "Looking at the fundamentals, gold is now in a state of supply deficit. Even with weak global demand, mine production is declining amid rising financing costs and aging mines. According to latest figures, global mine production dropped by 3.6 per cent to 2,385 tonnes, its lowest level since 1995," as per the figures revealed by NCB Economics Department.

In the first quarter of this year, gold is expected to be at $797 per ounce, in Q2 at $859, Q3 at $844 and falling to $792 in Q4, according to estimates of Standard Bank.

"These forecasts are based on our view on oil prices and dollar and euro exchange rate. The numbers do not capture the speculative geopolitical risk premium in gold prices, which I think is an important short-term driver, and the impact of hedge fund and managed futures investment flows. Risks could still be on the upside if the geopolitical risk premium in current gold prices becomes inflated and market systemic risks remain around current levels," Madinane said.

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