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Sun 1 Jan 2012 04:06 PM

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Riding the rollercoaster

Volatility has been the name of the game for precious metal values in 2011. So what's next?

Riding the rollercoaster
Wall Street traders

In September, gold hit a new all-time high of $1,921.15 an ounce. The cost of the precious metal had, for several months, been rising rapidly as investors moved to protect their wealth from weaker currencies, falling equities and rising inflation. Just one month later it hit its lowest levels in two years of $1,032.70 an ounce.

Silver, platinum and palladium have been just as volatile in the last twelve months so what can we expect for the precious metals market in the year ahead? That, of course, depends on who you ask.

“I expect the gold high in the next year to be in the first half of the year and I’m looking towards $2,500 an ounce,” Gerhard Schubert, head of precious metals at Dubai-based Emirates NBD, tells Arabian Business.

“We are likely to see a fresh all-time high next year. The high this year was $1,920 and I could easily see gold above $2,000 in 2012,” adds Jeff Rhodes, CEO of Dubai’s INTL Commodities.

Gold has always been seen as a safe haven during volatile times but its large-scale swings since the onset of the global financial crisis in 2008 has split investor opinion.

“We believe that the stock markets will recover in the near future, particularly in the US. Growth in the world’s largest economy will shed light in major economies such as China and Europe, thus boosting confidence in the US dollar and somewhat dilute demand for precious metals' asset-haven characteristics,” says Nigel
Smith, global technical manager of financial advisory firm deVere Group.

In 1971, US president Richard Nixon ended the convertibility of dollars into gold in a bid to bring down inflation and a deteriorating balance of payments. The move signalled not only the end of the Bretton Woods system — under which fixed exchange rates were linked to the gold price — but also the end of an era of a financial system anchored to gold.

Forty years later gold has reclaimed its dominant position in the world’s financial system. For some time central banks, hedge funds and even those with little or no experience of gold have been flocking to the precious metal in their droves amid concerns the global economy could be plunging into a second recession.

Central banks globally bought around 280 tonnes of gold during the first half of 2011, according to data from the World Gold Council. Governments, central banks and multilateral institutions such as the International Monetary Fund own approximately eighteen percent of the world’s gold, the trade body says.

Central banks aren’t the only investors looking to secure their assets amid the turbulence of the economy. Dubai’s Gold Souq traders say they have seen a 100 percent increase in the sale of gold bullion to the general public in the last six months.

“I would say in the past six months it has least doubled; before I used to get one or two customers [buying bullion], now it’s at least four to five customers per day,” Chetan Dhakan of National Jewellery, told Arabian Business in September.

In August, the Dubai Multi Commodities Centre Authority unveiled a prototype of the country’s first gold bullion coin aimed at targeting members of the general public interested in gold. DMCC is currently in talks with the UAE Central Bank to designate the five ounce gold coin, which is worth around $8,167 at current prices, as the first gold bullion legal tender in the Middle East.

Silver, both an industrial and a precious metal, typically tracks gold but is also known as the “wild child” of the metals market due to its exaggerated swings. Like its more expensive counterpart, investors have continued to flock to the precious metal amid economic woes.

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In 2010, silver prices outperformed all base metals and bullion commodities giving a return of 73 percent. Year to date, silver has declined $1 to $29 an ounce but has seen highs $48.70 and lows of $26.6.

“Silver is having a direct relationship with the euro and inverse relationship with US dollar, as the movement of the euro is generally moving in negative direction with US dollar and most of the other currencies, we may face zigzag movement in the prices of silver,” Commodity Online says in its market report for precious metals.

Much of where gold, silver and platinum prices end up next year will depend on the outlook for the global economy. At the beginning of this month 26 of the 27 members of the European Union backed new fiscal rules to keep budgets in line with only UK opting out. But many fear the treaty will not be enough to prevent more countries from seeking a bailout.

Auditors Ernst & Young last week warned the eurozone is facing a “bleak” winter. The firm predicted economic growth of just 0.1 percent for the whole of 2012 and said unemployment was unlikely to fall below ten percent until 2015.

“The reforms agreed at the summit on 9 December were a step in the right direction and the response seems to have been mildly positive,” Ernst & Young said. “Investors remain very concerned about the commitment and ability of eurozone governments to implement reforms quickly,” it added.

Italy’s employers’ lobby Confindustria last week slashed its 2012 growth forecast for the country to -1.6 percent from 0.2 percent and said Italy was already in a recession. Standard Chartered predicts the UK economy will shrink by 1.3 percent next year but said expansion in Asia, which is predicted to grow 6.5 percent next year, will continue.

The eurozone’s sovereign debt crisis coupled with uncertainty over its fiscal policy will continue to weigh on the US economy next year. A Reuters poll dated 14 December says the US will grow moderately next year, starving off the need for additional stimulus from the Federal Reserve.

Most analysts agree next year’s grim economic outlook will bolster demand for precious metals. A UBS investor note issued last week lists gold as one of its top commodity picks for next year with a predicted average price of $2,050 an ounce in 2012.

“I don’t think the world has changed, all of the problems that have been in place that have sparked a move in into gold over the last five years are still there. I still think there is disillusionment with currencies and the ability of governments to simply print more bank notes,” says Rhodes. “I think the ingredients there are still for higher gold prices in 2012,” he adds.

Schubert agrees. “On the substantial issues we have not seen any progress being made. In the US we have to expect for eleven months of hard electioneering; the Democrats are going to say blue and Republicans are going to see red and I think that’s going to continue,” he explains.

“The European issues…I think it’s pretty clear in which direction it’s going but the devil is always in the detail. Will this treaty really be able to correct all of the flaws from the original Euro treaty? I think these drivers will become more and more back into the headlines come the beginning of the new year and gold will be profiting from a certain fear factor,” he says.

Citi’s Twelve Charts of Christmas predicts gold could see highs of $2,300-$2,400 area in the second half of 2012 and as much as $3,400 over the next two years.

“While we remain cautious on gold in the near term and believe that we could correct lower towards $1,600 and possibly re-test the $1,550 area we continue to believe that the bull market remains intact. We believe that 2012 may be reminiscent of 1978 when gold rallied nearly 50 percent off the 1977 close,” says the lender.

“On a longer term basis we expect even higher levels and target a move towards $3,400 over the next two years or so,” it adds.

Silver is likely to follow gold, says Rhodes. “We are currently seeing very strong interest from India into this dip below $30. I would expect the price to stabilise and move higher. If I am correct about gold in 2012, I could easier see silver above $50.”

Schubert adds: “The investment community has largely ignored silver in the latter half of the year. For silver to raise significantly the fantasy of the investment community has to be re-energised. The downside I think is pretty well protected, I am looking to a downside of $26 but I am looking to follow gold more on the upside.”

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