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Optimism Returns to Gold Market
By Leia Toovey- Exclusive to Gold Investing News
Gold prices inched higher on Friday, heading for their second weekly advance as a stalling greenback and uncertainty in the Eurozone coaxed investors back into the safe haven investment.
OnFriday, the US dollar was falling against most major currenciesdue tothe release of negative data regarding the state of the world’slargesteconomy. The Thomson Reuters/University of Michigan consumer sentiment indexforearly October fell to 57.5 from 59.4 at the end ofSeptember. Economistsforecast that it would increase to 60.0. Inaddition, the greenback wasweak relative the euro over expectationsthat European leaders willannounce a comprehensive plan to prevent adebt crisis from paralyzingthe region.
In its monthly bulletin Thursday, the European Central Banksaid theeconomic outlook “remains subject to particularly highuncertainty andintensified downside risks.” Analysts are uneasy aboutthe health of theregion’s economy and would like to see leaders actswiftly, andaggressively, to stave off a financial crisis. On Thursday,Standard andpoor’s, downgraded Spain’s economy, citing “slowinggrowth” and theincreased risk that the “rising defaults,” will wreakhavoc on thecountry’s banks.
Currently, the G20isin meetings, and reportedly, the top topic of conversation is howtoprevent financial disaster in the Eurozone. Earlier, theemergingeconomies had suggested that the IMF may need more cash, tomakeavailable to the Eurozone, in case the current crisisintensifies.Today, however, the leaders of The US, the UK, Canada,Japan, andAustralia opposed providing more funds for the IMF, sayingthat it isnot the responsibility of the taxpayers of those countries tobail outthe Eurozone.
So far this year, gold has both rallied, andfell, in response to theongoing Eurozone crisis. Since touching arecord high $1,923.70 anounce on Sept. 6, gold has slumped as much as 20percent, the metal’sbiggest slide in three years, as investors soldgold holdings in orderto cover for losses in other markets. TheSeptember sell-off resulted ina loss of 4.2 trillion from global equitymarkets.
Looking forward, traders believe that gold will regain its strength. On Friday, UBS (NYSE:UBS)claimedthat gold was one of its top three commodities picks,despitedowngrading its price projection for the safe haven investment.The firmreduced its 2011 average gold price to $1,615 from $1,665 toallow formark-to-market adjustments and the impact of a stronger dollar,but keptits 2012 forecast at $2,075.“Our core view is that ongoingglobalmacroeconomic disappointments, the inevitability of furthernegativeturns in the European sovereign debt crisis, and low business,consumerand investor confidence will lead to gold being increasinglyused as theline of defense against negative market outcomes,” the banktoldclients. UBS analysts believe gold’s biggest risk is arapiddeterioration in bank funding tied to escalating liquidityconcerns.
According to data collected by to Bloomberg,investorsare adding to their holdings in gold-backed exchange-tradedproducts forthe first time in a month. Bloomberg’s survey also showedthat, partlydue to the metal’s recent weakness, traders and analystsare the mostbullish for gold prices, in three years, betting thatEurope’s debtcrisis, and slowing global growth will boost demand forgold as a safehaven investment. “Gold remains underpinned by goodvolumes of physicaland retail investment purchases,” James Moore, an analyst at The Bullion DeskinLondon, wrote in a report today. “Following the wash-out of fundandspeculation investment longs, the market is well placed totradehigher.”
Gold may get a boost, this October, from highjewelry demand duringthe upcoming festivals in India. Traders havereported strong physicalbuying, and one dealer commented that manytraders are convinced thatthat prices will not further go down fromhere, while the “sky is thelimit for upside.” India is gold’s biggestconsumer, and demand in thecountry is expected to hit a record 1,000tons this financial year dueto growing rural incomes.
Securities Disclosure: I, Leia Toovey, hold no direct equity interests in any company mentioned in this article.