LONDON, January 10, 2010 - Gold prices are set to continue marching higher in 2010 after hitting a record peak above $1,220 an ounce late last year, with the rising popularity of exchange-traded funds, a weak dollar outlook and inflation concerns seen boosting the appetite for the precious metal, analysts say.
Gold advanced for a ninth straight year in 2009 and surged more than $200 an ounce, the biggest annual gain since 1979 when the metal climbed nearly $300. In percentage terms, gold rose 25 percent last year.
The rally has shown no sign of abating this year. A survey of 28 global precious metals analysts and traders, conducted by the London Bullion Market Association, showed that gold is expected to hit record peaks again in 2010, with a predicted average high of $1,394.20.
None of the forecasters see the gold price falling below $900, the association said in a statement.
Analysts say that the dollar, which fell sharply during much of last year before recovering some losses in December, could play a crucial role in setting the precious metal’s price trend this year.
A weaker U.S. currency makes dollar-denominated gold cheaper for holders of other currencies and boosts demand for the metal in countries such as India, the world’s top gold consumer, and China.
“We need to see much more dollar weakness on a trade-weighted basis to sustain a rally in gold. While we expect dollar weakness towards mid-2010, current uncertainty in mainly the Euro-zone may provide interim support to the dollar,” Standard Bank said in a recent report.
Inflation concerns are also expected to raise the metal’s appeal. People tend to buy gold when the real value of money diminishes. As nations increase their money supply, their currencies lose purchasing power.
“We are concerned that the massive government stimulus packages via quantitative easing, paid for with borrowed and printed money is having only a relatively modest impact on growth as bank balance sheets may take longer to repair than widely expected,” said Ross Norman of TheBullionDesk.com in London.
“This, we believe will give rise to ongoing uncertainty on the tenure and outcome of these actions. As a result, we foresee increased interest in gold from the investment community with faith in fiat currencies undermined; this should ensure that investment demand not only fills the gap from diminished jewellery sales as prices rise, it should lead to a significant increase in total gold demand,” Norman said.
Another significant factor in gold’s rally is growing investment in exchange-traded funds backed by physical metal. A rise in the popularity of such funds means gold’s available supply in the market diminishes as the metal is taken out of circulation and kept in bank vaults.
The world's largest gold exchange-traded fund (ETF), SPDR Gold Trust, had 1,134 tonnes of gold by the end of 2009. Its holdings surged 45 percent last year as more and more people invested in the metal to gain strong returns.
Analysts say that gold still accounts for a tiny fraction of the portfolio of investors and hedge funds and a small rise in the percentage could translate into increased demand for gold and even stronger prices.
According to some estimates, gold ETFs and equities amount to just 0.7 percent of total managed assets and 0.3 percent of total global financial assets.
The value of all the gold that has ever been mined approximately amounts to $6 trillion, which is very small when compared to $123 trillion of financial assets.
“Any rally should continue to be driven by investors, and they will prefer investing in physical metal. We expect gold trading in a range between $1,050 and $1,375 an ounce in 2010,” said Wolfgang Wrzesniok-Rossbach, head of marketing and sales at Heraeus.