Gold’s Time To Shine?

Over the next two weeks, gold prices will be keenly watched around the world. Having underperformed other safety peers like the Swiss Franc and treasury this year, gold has been trading in a narrow range between $1500 and $1800 per ounce. This is in stark contrast to last year when gold prices touched a historic high of $1900 per ounce in September, after rallying by 70 per cent from December 2008 to June 2011.

There are many important cues that will determine whether the yellow metal rebounds or remains in a tight trading range. The US unemployment report will be an important factor, as will the US presidential election that takes place on 6 November.

The Diwali festivities in India, which is historically a period of heavy gold buying, could also ramp up short-term demand. India is the world’s highest consumer of gold, holding $1 trillion worth of the commodity and importing $60 billion annually. However, demand for gold softened this year in part due to a weaker rupee and higher import duties. This price sensitive market could see renewed buying in the long-term if the rupee strengthens and the monetary policy remains dovish.

Another imperative cue will be the interest for gold from China. India and China together constitute 50 per cent of the world’s gold demand. But the Chinese too are buying less gold, investing instead in other lucrative asset classes, like property and equities. This is understandably taking the sheen off gold.

On the trade and supply side, gold exports around the world remained strong in 2011, rallying up 36 per cent from 2010, as production of gold touched 1800 tonnes (an increase of 5.5 per cent). Gold production costs have subsequently risen as well, and this – abetted with an impending mine strike in the world’s fifth largest gold producing country, South Africa – could prove to be an important determinant for this asset class.

Either way, gold continues to play a crucial role in the UAE’s non-oil trade sector, topping the list of imports to and exports from the UAE in 2011. While physical buying is weak in the region, physical sales have increased as customers cash in on still historically high prices.

Given the volatile global economy and gold’s stronghold as a safe haven, global punters will be watching bullion’s price more hawkishly than ever in the coming weeks.