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 INDEX  >  Seven Reasons to Invest in Gold

Published on March. 7, 2010  
By Bradley George and Daniel Sacks


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World's largest solid gold brick weighing 220kg (485lb)There are both headwinds and tailwinds influencing the gold price, but the positives combined with the degree of investment demand from wealthier investors should outweigh the negatives. We believe this is likely to force a peak that is nearer $1,300 per ounce over the next six months, with $1,000 per ounce becoming the new long-term floor. In our view, the following factors are currently influencing the gold price in the medium to long-term.

1. Last week’s IMF announcement of its plan to sell 191.3 tonnes of bullion on the open market under the Central Bank Gold Agreement put pressure on gold prices.

This negative price response seems to be due to the perceived lack of demand from official sectors to purchase the IMF balance – last year only 150 tonnes of a planned sale of 400 tonnes was sold.

Given the publicity that surrounded the Indian central bank’s purchase of gold, reluctance from other large central banks to take the IMF balance may be as a result of an unwillingness to disclose their views and subsequent moves relating to the dollar or gold. Instead they may be pursuing a strategy of steady accumulation over time in the secondary market.

2. In our view, recent euro weakness is the result of fiscal issues in Greece and other peripherals rather than a longer-term fundamental bearish issue. We therefore do not believe this is likely to be negative for gold in the longer-term.

3. Gold’s physical market – jewellery fabrication – appears to have been stronger in the early part of this year, suggesting acceptance of higher prices.

According to the World Gold Council’s latest update, global demand for jewellery dropped by 20pc in 2009, the biggest annual decline on record, while survey data was the weakest in over 20 years at less than 1,700 tonnes – nearly 50pc lower than 2005 – but it appears that this may now be reversing.

4. In theory, the longer-term impact of President Obama's bank proposals on gold may be negative. Passage of his proposed legislation could curtail the volume of commodity trading, which on balance is likely to be negative for gold.

5. Actual and anticipated monetary tightening in China has also coincided with gold price declines this year. For example, on 12 January 2010 and 12 February 2010, the Chinese central bank announced an increase in bank reserve requirements in response to the rapid increase in bank lending.

The People's Bank of China said it will raise the reserve-requirement ratio for banks by half a percentage point from Feb. 25, the second increase this year. This will make it standard for major banks to keep 16.5pc of their deposits on reserve, though rates can vary by bank. Further tightening may trigger similar declines.

6. Currently, there is the possibility that the Australian government may scrap the state-based royalty taxes that apply to mining projects and replace them with a uniform national resource rent tax in order to raise more revenue.

Should adoption of this tax discourage marginal gold production in the world’s third largest gold producer, the longer-term impact of the tax may be positive for gold prices.

7. We believe the result of January’s US Federal Reserve Open Market Committee meeting is more bullish than bearish for bullion going forward.

Although the outlook for inflation is stable according to the Federal Reserve’s statement, we believe the reaffirmation by the Federal Reserve that rates are likely to remain low for an extended period should be supportive of gold prices in the long term.

Bradley George and Daniel Sacks, co-Portfolio Managers of the Investec Global Gold Fund and part of the Global Commodities and Resources Team at Investec Asset Management


© 2009  Article Source
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As with all investments, the price of precious metals changes rapidly, and as such should be considered volatile. Upon entering the metals market, the risk of loss is solely that of the client. Only individuals who are capable of sustaining a capital loss should consider purchasing precious metals. Acquisitions in precious metals which are financed are considered high risk.
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