Long term trend of gold.

 

Introduction

Continuing global macroeconomic and geopolitical risk, the emergence of inflation and the on-going challenges to manage massive sovereign debt all point to higher commodities prices over the long term. Silver, precious metals and gold have been the best performing asset classes in recent years outperforming equities, REIT and most asset classes over a 3, 5 and 10 year period. Natural gas is the worst one year performer and even oil returns don’t top that of precious metals.

We believe that the gold 10 year bull market remain firmly intact in spite of the highest level of volatility is seen in the past months with price up already up 21% this year at the time of writing this report. The euro-zone debt crisis, currency wars, and deep uncertainty among investors are among the factors driving prices higher.

Over the next ten years or more, metal prices are predicted to remain high. This is mostly due to increasing demand from countries undergoing intensive levels of urbanisation and infrastructure building. In particular China and India will drive the cost of metals across the board. Silver is widely predicted by metal and silver markets analysts to go higher through 2011 and 2012. As long as the systematic devaluation of dollar by the Fed (i.e. interest rates near zero) broad base commodities trends will continue positive. Once interest rates start to increase the dollar will gradually pick up, pushing gold and silver down,

GOLD OUTLOOK

Gold is benefiting from growing investor anxiety about ineffective government policies, unsustainable government debt levels, and the potential for a further global slowdown. As central bankers and other policymakers run out of options, The possibility that government remedies for debt problems will indirectly lead to higher gold prices through inflation is also encouraging investment in gold. The paucity of suitable alternative safe havens, following recent interventions in the currency markets, has further elevated gold’s status.

From supply perspective gold prices are well above the production cost. Extensive investment is done in the past decade in the mining cycle which wil eventually increase the output in the next four years. The current high prices are encouraging a significant increase in scrap supply. However high gold prices are crimpling jewellery demand which is losing market share to investment demand for other form of physical gold including coins and small bar may ease at current prices.

Gold is a hedge against macroeconomic, systemic and inflationary risk with the attractive added potential for significant capital gains. . According to Ibbotson Associates, precious metals are the most positively correlated asset class to inflation. From a strategic point of view, Ibbotson determined that portfolios could reduce risks and improve returns with a 7-15% allocation to precious metals.

We expect a target price of gold to rise up to $ 2,025 in the year 2012. The extreme rise up to $ 2,025 for 2012 is based primarily due to the fear and heightened investor anxieties and due to the asset allocation to the safer heaven. The long term price of the gold is $1,500.

The gold 10 year rally is still intact. Gold has been one of the beneficiaries who has enjoyed considerable gains due to the financial crisis. It rallied at various stages of financial crisis and post crisis, sub-prime mortgage blow-up in the beginning of 2007 to a full-blown global credit and economic turndown in 2008-09, after that sovereign debt crisis which has its roots started from 2010. Gold has outperformed various other asset classes throughout the entire period.

Geo-political risk is also one of the pivotal reasons for the increase in the gold prices. Popular uprisings in North Africa and the Middle East raised fears about oil supply disruptions, triggering a surge in oil prices that also buoyed gold. In addition, the United Nations Food and Agricultural Organization declared a world food crisis this year, due to a combination of drought and floods in the major grain-producing nations of Russia, Ukraine, Kazakhstan, and Australia. Although the FAO food crisis concerns are lifted now but the food prices remain near all-time high till the period of February 2011,

Gold has shown significant performance form 2007, although we see several sharp corrections but the rally remains intact and shows no signs of reversals and this correction live for a very short period of time. Despite wide swings in prices, gold hit a succession of highs throughout the summer, reaching an intraday record of $ 1,920/oz in the first week of September 2011.

The jewellery account for 50% of the physical bullion market the investment demand is the main due to the investment demand is the man factor for the higher gold prices. The gold Exchange Traded Funds (ETF’s) accounts for the bulk of investment in the bullion. The 10 largest ETFs hold an aggregate of 2,250t of bullion, equivalent to more than 80% of annual global mine production.

High prices are eroding demand for jewellery, which is freeing up bullion for the investment markets. The sluggish economy also is weighing on purchases of some luxury goods. Demand for coins and small bars have been very strong for many quarters. But we question whether retail investors will continue to purchase coins and bars in such heavy volume.

The combination of the decline in jewellery demand and the increase in scrap supplies will free up considerable amounts of bullion for the investment markets, we believe. This should moderate – but not reverse – further rallies.