Gold prices are rising in a climate of war and uncertainty. However, the moot question is will this trend continue?
Currently,
interest rates are at historic low and equities are
out of favor, as the world faces a vicious stock
market decline; the Dow Jones Industrial Average
dropped 38%, the S&P 500 lost 49%, and the NASDAQ
lost nearly 80%. In contrast, the yellow metal had
witnessed a price appreciation of more than 25% in the
calendar year 2002. Gold is flexing its muscle for the
first time since 1980. It broke clearly above a
23-year downtrend and above its prior 1999 peak, which
is something gold has not done since the 1980 peak.
The sharp advance in gold price owes to a number of
factors. A weakening US dollar helped boost the metal
as it is denominated in US dollars. Therefore, when
dollar weakens gold becomes more affordable to
countries like India and the euro-zone, which leads to
increased demand for the precious metal and higher
gold prices. Market analysts opine that it is poised
to rise in a sustained manner this year and the next,
and possibly for a longer period.
Although
physical off-take was reduced in the industrial sector
last year, activity in the investment market took gold
prices higher as investors looked forward to mitigate
their risk. In some countries such as Japan there has
been very strong purchasing by both the mainstreet (in
form of coins and bars) as well as by the professional
investors and speculators. Similar trends can be seen
in parts of Europe, the Middle East and North America.
The professional investor has been drawn to the gold
market for a number of reasons: Concerns about the
equity markets and lingering doubts about the
turnaround in corporate profitability; banking crisis,
notably in Argentina and Japan; corporate governance
and the increasing mistrust of corporate reports and
corporate executives; and the fact that the dollar,
the yen and initially also the euro will all be under
pressure in the event of a war. All these have
combined to generate a desire on the part of the
investors to hold an asset class that would diversify
the risk. And, gold has been one of the favored
beneficiaries. |
