Bullion bandwagon

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Twice in March 2008 and once in February this year, gold prices touched $1000 per ounce.

The price of gold, traditionally a safe haven investment in times of economic turbulence, hit $1000 for only the fourth time in history early last week. But some experts say its current price is unsustainable.

The question on every expert's lips when gold broke through the magical $1000 an ounce mark last Tuesday and rose to an 18 month high was would the price hold?

During a time of acute uncertainty about the global economy, traditional safe haven buying of the precious metal is the main reason why gold has risen 14.1 percent in value this year. Historically, however, demand has not been strong enough to keep the price above the psychologically important $1000 mark.

Twice in March 2008 and once in February this year, bullion touched $1000 and on both occasions it quickly slipped back into three-digit territory. Analysts surveyed by Arabian Business agree that $1000 gold is unsustainable, at least for now.

"I am unconvinced about the sustainability," says John Reade, a metals analyst at UBS in London.

"A lot will depend on the reaction when we go through a $1000. If we manage to hold above there for 24 hours then the chances are we can go higher. But if we only trade through there and end the day back below $1000 an ounce that probably signals a correction."

Gold reached as high as $1007.70 on September 8 and when Arabian Business went to the press, it had slumped to $999.05.

"We are forecasting an average gold price of $890 per ounce next year owing primarily to stronger economic growth and less investor interest in gold," says Caroline Bain, senior commodities editor at the Economist Intelligence Unit in London.

"The effects of the stimulus [government stimulus packages] will mean that GDP growth [and financial markets] will be stronger in the first half of next year and gold will lose its allure as a safe haven in times of uncertainty."

Gold is usually bought as an alternative to the US dollar by investors looking to preserve their capital during times of financial upheaval.

However, the recent weakness of the US currency on fears over its economy has meant demand for gold has been particularly strong.

In March 2008 concerns about the financial crisis were brewing, which weakened the dollar and drove gold to a record high of $1032 per ounce.

But according to Reade, the current rally in the gold price, which began at the start of the month, is down to speculative interest from short term investors rather than physical demand which is at low levels.

"There are lots of reasons why gold gets bought and sold, but at this time it is more technical - [and is coming from] people who follow technical analysis rather than a particular safe haven trade," says Reade.

"We have seen gold bought enthusiastically as a safe haven during the first quarter of this year when other asset markets were under pressure but the big bounce in equities we have seen since then has diminished its role as a safe haven in the short term," he adds.

It is this speculation that leads figures in the gold industry to be skeptical about the metal's current rally.

"There is no physical demand, it is purely speculative buying," says Firoz Merchant, chairman of Dubai-based jewellers Pure Gold Group.

"This week and next is crucial," he adds. "We will see [gold rise to] $1200 shortly, probably by the end of the year, but $1000 is a psychological level. If we don't break this level [for any great length of time] then whoever owns gold will sell."

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