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Gold Hits Short Term High as Global Recession Sparks Risk Aversion

Economics / Gold & Silver 2009 Apr 23, 2009 - 08:11 AM GMT

By: Adrian_Ash

Economics

THE PRICE OF PHYSICAL gold held above a one-week high early Thursday in London, recording its best Gold Fix in seven sessions at $894 an ounce as European stock markets flipped in and out of the red.

"It is risk aversion that is fuelling gold's rally," said one commodity analyst to India's Economic Times today.



"The bias is on the upside," agrees Kunal Shah at Nirmal Bang Commodities, also in Mumbai, "as economic uncertainties are creeping up giving rise to risk aversion."

Yesterday the International Monetary Fund (IMF) confirmed its prediction of the worst global downturn since the 1930s, slashing its January forecast of 0.5% growth to a 1.3% contraction for 2009.

Today the Gold Price for Indian investors – the world's hungriest buyers of physical metal – ended unchanged at 14,413 Rupees on the MCX June contract.

British, Swiss and Canadian investors now Ready to Buy Gold saw the price tick back from fresh 3-week highs.

Of 182 economies tracked by the IMF, some 72 are now expected to shrink this year, including 30 of the world's 34 most developed nations.

"By any measure," the IMF warns in its twice-annual World Economic Outlook, "this downturn represents by far the deepest global recession since the Great Depression."

During the financial crisis to date, "Gold has been one of the few assets that has genuinely provided investors with diversification," notes Natalie Dempster in her latest analysis for promotional-group the World Gold Council (WGC).

"There is no intrinsic reason why gold should perform badly during periods of deflation, like equities for example, which typically suffer profoundly as the earnings outlook collapses and/or the real debt burden of companies grows.

"Traditional assets like equities and bonds are a poor hedge against inflation," says Dempster, pointing to the sharp risk that "when banks start to lend again and consumers start to spend, inflation will accelerate.

"By contrast, gold, and commodities in general, often perform at their best."

In each of the nine years since 1971 when US consumer-price inflation has exceeded 5% year-on-year, the Gold Price averaged 31% annual gains on the WGC's analysis.

"Commodities rose by 9% and bonds and equities were essentially unchanged."

For now, however, "[Gold Trading] volumes remain low and investment interest little," says Walter de Wet in today's note from Standard Bank here in London.

"A break above $905 is needed before the market could become bullish on the metal."

"The gold market still seems to be lacking momentum to push beyond the $900 mark," agrees Pradeep Unni at Richcomm DMCC in Dubai, "weighed down by stalling investment in the world’s largest gold-backed exchange-traded fund."

With the world's strongest jewelry markets becoming Net Exporters of Gold for the first time since the 1930s so far in 2009, the first three months of this year witnessed fresh record inflows to Gold ETF investment funds.

Western investors added a record 469 tonnes of gold to the ETFs' total hoard, says GFMS data, squashing the previous quarterly record of 145 tonnes and taking the total value of gold held by the largest funds to $48.6 billion.

Global stock-markets, for comparison, ended Jan. '09 worth $31 trillion according to the World Federation of Exchanges (WFE).

Gold ETF growth has since stalled, with New York's SPDR – which holds Gold Bullion in trust for shareholders paying 0.4% per year in fees – sticking at 1,106 tonnes since Thursday last week and standing unchanged from this time a month ago.

Retail-investment demand for gold also appears to be easing from the recent records, says Wolfgang Wrzesniok-Rossbach at German refining group Heraeus.

Following the dramatic bar and Gold Coin Shortage of 2008, which has forced retail premiums on even the most-heavily minted coins to 10% and above, "From next week onwards, all the larger bars (1-ounce upwards) and a little later even the smaller, minted ones should be available again for prompt delivery," he writes in his Precious Metals Weekly today.

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2009

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

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