What a new year for gold! One by one, the yellow metal is shattering records. First, gold flew by the $850 mark on the first trading day of 2008, hitting $861.80 per ounce to surpass the record set on 21 January 1980. Now, gold traded up $21.80 at an all-time intraday high of $883.80 per ounce today, exceeding the previous high of $875 touched briefly on the same day in January 1980.
The dollar’s relationship with the euro - the traditional inverse relationship with the gold price - is only marginally weaker today, trading near levels of $1.4721. Rumours of a producer hedgebook buyback are floating around, but the validity of that remains to be seen. So what is driving gold’s big gains?
“I think it’s a combination of things,” Jessica Cross, chief executive of commodities consultancy the VM Group, told Resource Investor. “It’s been sort of strong for months now. All the political uncertainties that are going on, particularly the Middle East and Pakistan - that has not gone away. It’s kind of intensifying.”
United States-Iranian tensions increased today as Iran denied U.S. charges that Iranian boats provoked U.S. Naval ships last weekend in the Strait of Hormuz, a main channel for oil shipments in the Middle East. U.S. officials allege the boats moved aggressively at U.S. ships, and U.S. forces received threatening radio calls indicating the Iranian forces intended to blow up the ships. Iran dismissed the charges, saying the manoeuvres were a part of routine contact.
In addition, political instability continues to resonate in Pakistan, where reactions to the assassination of opposition leader and former Prime Minister Benazir Bhutto remain strong. In response to the murder, Pakistan has pushed back until elections that may have returned the nuclear-armed country to democracy after eight years of military rule. The elections will now be on 18 February.
“The incident in the strategically vital Strait of Hormuz highlights that geopolitical risk remains heightened,” said Mark O’Byrne, director of Gold and Silver Investments Ltd., in a research note.
“The spot price of (gold) came close to $880 as the trade overseas was seen massing into positions following yesterday’s incident between the U.S. and Iran in the waters off Hormuz,” Jon Nadler of Kitco Bullion Dealers said in a note. “Although the reaction was somewhat delayed and did not result in large-scale moves in the U.S. dollar or crude oil, gold market participants have now given investors reason to actually speak of gold having traded at $875 per ounce.”
Gold is seeing some of the same supports experienced during its last run to record highs in 1979-1980, when the Shah of Iran was overthrown, oil surged to all-time highs and U.S. inflation surpassed 13%. Last year, gold saw its seventh straight year of positive returns and best performance since that era. The average closing spot gold price of $695.85 in 2007 was the highest ever, trouncing the 1980 average price of $614.50.
Oil is trading above $97 per barrel today, adding more than $2 following dismal U.S. employment and housing reports. Crude hit an all-time high of $100.05 last week.
“You’ve got high oil prices, which means petro-dollars flowing into the Middle East, which is a traditional gold buying area,” Cross said. “And with the uncertainty of the geopolitical stuff going on, it’s expected that they would be buying a lot of gold.”
Volatility continues to characterize the gold market, with the yellow metal falling a few dollars yesterday and gaining $20 today. Cross attributes much of that volatility to the recent holiday season.
“I should imagine - and I might be wrong on this - that volatility will probably come down a little bit when everybody comes back from holiday,” she said. “I think not everybody is back yet, and that is why the market is a bit more volatile than it might normally be.”
Despite the record-high price today, gold is still quite short of 1980’s inflation-adjusted high of $2,200. But that number may not be out of range in the future, Cross said, especially when considering the thin margins between supply and demand in the gold market.
“It must be (within range),” she said. “This year, we’re looking for a high of $900, and I think that it’s easily doable. Then beyond that, at over $900 I think you start saying that possibly more scrap will start coming on, that kind of thing, and the market will adjust.
“The other thing is we have to watch very closely how the jewellery market will begin to respond. There’s a time lag in jewellery sales, particularly in places like the U.S.…Basically, the jewellers will take orders and put jewellery into stock. What hasn’t sold over the Christmas period will either be returned as recycling or there will have to be a reduction in price. But then as the price goes up, every time a jeweller has to replace his stock, he’s having to replace it at a higher and higher price because the cost of raw materials is going up.”
As a result, jewellers will have to raise prices, which will cause consumption to fall, particularly as a recession looms over the U.S. economy, she said.
Gold futures ended today up $18.30 at $880.30 per ounce, a gain of 2.12%. Read more Resource Investor coverage of gold's rally to record highs here.
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