Amid the rubble, gold shines | FT Alphaville

Amid the rubble, gold shines

When it comes to talk of market outlooks, one of the few places on the planet you might find some bonhomie and optimism is – believe it or not – in Kyoto, scene of the annual meeting of the London Bullion Market Association (yes, they’re still doing alright for themselves..)

As Javier Blas, the FT’s commodities correspondent, reports from the scene, the mood is definitely bullish, amid a joyously firm belief that gold prices will rise next year as the financial crisis pushes more investors into the precious metal safe haven.

The gold industry forecasts bullion prices at about $958.6 a troy ounce by November next year, according to the annual LBMA poll among delegates. The poll, which has been a reliable indicator in the past, compares with current prices just above $902 (on Tuesday, spot gold drifted lower to $900.90, down 0.3 per cent at 0410 GMT).

Last year, LBMA delegates gathered in Mumbai correctly forecast gold prices surging to record levels and predicted that by September 2008 prices will be at about $840 an ounce, almost the correct level just 10 days ago.

In remarks that evoke the “karma” comments of the hapless Sharon Stone, Jeremy Charles, LBMA chairman, told delegates that gold’s role as a safe haven has returned with as a vengeance amid Wall Street’s woes: “High bullion prices are here to stay,” he said, in bullish comments that came as many delegates forecast gold prices in 2009 in a $700 to $1,200 an ounce range.

As Reuters reports Tuesday, gold is “shining like a rare star in the dimming financial firmament”, attracting investors anxious to protect their portfolios from the crisis in equities and other assets.

The metal surged 5 per cent on Monday, after the US House of Representatives rejected the proposed $700bn financial sector bailout plan and sent nearly all other markets – including oil and equities – reeling.

Jonathan Spall, head of commodities sales at Barclays Capital, said at the Kyoto conference that the gold market was witnessing a “sea change” as bullion was attracting new players, such as hedge funds, that previously considered the metal as a relic. “Hedge funds see those days gold a much interesting place to be in,” he noted.

So the future looks glittering right now. However – and it’s a big “however” – analysts caution that gold could lose its traditional safe-haven appeal if the US manages to pull together a financial markets rescue package.

“This market looks like a paradise for gold bugs, but you need to be careful. In the next three or four weeks, weak equity markets will drive safe-haven activity, but it could pass quickly,” Mark Pervan, senior commodities analyst at ANZ, told Reuters. He added gold could challenge a record high of $1,030.80 struck in March.

Indeed, at their Kyoto conference, some LBMA delegates noted that while they were bullish on gold prices in the short-term, it was unlikely that record prices could be sustained during a long period – not least because jewellery demand was likely to suffer.

Currencies, meanwhile, are going to be volatile and “some people will think holding gold is a better alternative than paper currency”, Toby Hassall, an analyst at Commodity Warrants Australia, told Reuters. “As long as this uncertainty in financial market continues, it will provide strong support for gold, while the long-term implications of the bailout should weaken the dollar”.

The dollar hit a four-month low against the yen on Tuesday, but the euro and sterling suffered as banks in Europe fell prey to the crisis.

‘The gold market is telling us that the world economy is in peril,’ said Jeffrey Nichols, managing director of American Precious Metals Advisors. ‘In the short run, any meaningful policy response that reduces fear and anxiety could trigger a correction in gold — but, longer term, whatever happens, gold is almost certainly moving higher,’ he said.

We’ll give the last word here to Marc (“Dr Doom”) Faber who months ago, commented in one of his monthly newsletters that in a deflationary global recession gold could initially come under some pressure but also, “once the realisation sinks in how messy deflation would be for over-indebted countries and households, its price would likely soar”.

Related links:
Gold vs Cash: Round I – FT Alphaville