Wednesday, October 14, 2009

>Gold: The currency of last resort (SMC)

Gold is rapidly becoming the only welcoming port in a sea of uncertainties as worries rise over the traditional safe heaven, specially like US dollar. Despite increasing signs that the world's worst economic crisis is close to bottoming out, investors are continuously pumping money into gold-backed securities as insurance against the outcome of massive cash injection and ultra-low interest rates by global central banks. Due to mounting risk appetite, Gold prices have already surpassed $1050/oz mark in New York last week and is standing to gain the most of all assets classes on its unlikely quality – neutrality. Gold has a unique dual quality of acting as a currency and as an asset which is making it utmost irresistible to buy in current scenario.

While no major currency is likely to replace the dollar anytime soon, the need for an alternative is clear, and growing. China among others is considering how to diversify its more than $2 trillion in foreign exchange reserves; talk of using other currencies to trade oil or commodities continues to circulate. Supply constraints mean there is no chance of a full revival of the gold standard era, when currencies were pegged directly to gold. The textbook reference of Gold as a currency has been given life post Lehman shock. The dollar index, a measure against six major currencies, fell about 14 percent since March this year while gold rose about 13 percent during the same period. Gold's bullish picture is also painted by specter of inflation for the remainder part of this year as well as for next year as well. Moreover, record high Investments demand and speculative positions in New York have quickened the velocity of Gold prices in past few weeks. SPDR Gold
Trust, the world's largest Gold-backed exchange-traded fund saw its holding rise to a record 1134.03 tonnes on June 1, a 44 percent rise in the year that contributed to gold's 16 percent rise in the same period.

This growing number of investors means price action could also add to further gold's volatility and is also sparking fresh interest in Gold as alternative assets. We have analyzed Gold's performance for coming 2010 from Macro and Micro point of view. The raining bucket of cheap money into major economies, Dollar weakness, Inflation concerns and need for alternative currency have resulted in our confidence to forecast Gold prices at $1100/oz as our first target and then $1200/oz as the most likely in 2010.

To see full report: GOLD