New gold high suggests uptrend is here to stay

Gold prices broke through the resistance level of $1,160/oz yesterday to reach an all-time high, with analysts predicting the bullion to rally further in the long term.

"Gold has averaged $950 for the this year with the current prices hovering above $1,150. I expect gold to swing between $1,300 and $1,000 for the next one year," MR Raghu, Senior Vice-President-Research, Kuwait Financial Centre, told Emirates Business.

"Gold is in an uptrend in the long term. After breaking $1,030 (previous top), next possible targets were $1,100 (in the shorter term), $1,250 and $1,500. We have already crossed $1,100 but indicators are showing that it is already in the overbought territory – however, it is early to say that it is fully overbought," Zeki Muderrisoglu. Fund Manager and Senior Technical Analyst, Asset Management Group, National Bank of Abu Dhabi.

"The $1,250 is a stronger resistance and there is a good chance that we will test this level in the next few years. Compared to the entry signal level ($1,030) and the signs that we are overbought (not fully), it is obviously riskier to open a new position at current levels," he said.

"Medium-term trend is also up and it is also overbought here (almost fully). I would say we are very close to the top of next six months. There is a good chance that a correction will start around 1,150 levels although there is no sign of it at yet. Corrections are about $50-$80 range. Without resetting overbought conditions, I would not recommend to open a position," he said.

"Investors should look at gold and dollar as two competitors on a see-saw," said the head of treasury of a Dubai-based bank. "If you expect the dollar to go down further – and who doesn't – then go for gold," he said.

Spot gold surged to a peak above $1,165 an ounce, extending gains to about a third so far this year.

"Gold is already up by 30 per cent for the year (compared to six per cent for 2008) with the month of November alone accounting for a 10 per cent rise (not taking yesterday's peak into account). The sharp rise in gold indicates the cloudy global status in terms of pulling out of recession," said Raghu.

"In spite of huge fiscal and monetary stimulus being enacted so far, the world is still a place with significant imbalances. In such a scenario, gold along with other commodities is viewed as a significant store of value leading to the high demand. The demand-side factor is further compounded by aggressive buying by some central banks (India, for instance)," he said. Giyas Gokkent, Chief Economist at National Bank of Abu Dhabi, said: "Various central banks across the world have been debasing their currencies through extremely accommodative conventional monetary policy and also through unorthodox 'quantitative easing' and/or it is feared that they will do so or will not rein back liquidity in time." This has strengthened gold prices as investors flock to gold related investment products.

"Countries that generate trade surpluses who are currently holding dollar overwhelmingly may also be moving towards more gold holdings although in the 1980s, central banks had been moving in precisely the opposite direction," he said.


Supply and demand

Investment demand for gold remained strong in the second quarter of 2009, rising 46 per cent on year-earlier level as investors continued a flight to quality.

Overall demand for gold fell back from recent high levels as weak economic conditions and high gold prices combined to impact demand, said the second quarter 2009 Gold Demand Trends report published by World Gold Council (WGC).

Although gold demand remains very high on a historical basis, total demand in Q2 2009 was down nine per cent on the levels of a year earlier, a six per cent decline in dollar value terms to $21.3b.

The figures, compiled independently for WGC by GFMS Limited, show that total identifiable investment demand for gold, which includes exchange traded funds (ETFs) and bars and coins, remained very strong. Investment demand rose to 222 tonnes, a 46 per cent increase on year-earlier levels, but below the extreme highs experienced during the previous three quarters when the economic and financial crisis was at its peak.

Retail investment, which includes demand for physical gold in the form of bars and coins, had another healthy quarter. Net retail investment was up 23 per cent relative to the previous quarter and 12 per cent on the levels of Q2 2008 as investors continued to seek out gold for its wealth preservation qualities.

Flows into gold ETFs returned to a more moderate, but historically robust level of 57 tonnes after an exceptional first quarter that saw net inflows total 465 tonnes.

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