GOLD REBOUNDS AND COULD HEAD HIGHER

In December last year, we wrote an article about whether gold prices had more room to increase given that spot gold price moved up from around US$300 in August 02 to US$340 within four to five months.

Prices did indeed rise. Gold hit a high of US$383 in early February 03 before succumbing to gravity to touch a low of US$319.4 per ounce in early April.

But gold prices have bounced up since. It closed around US$350 on 12 May 03. That is an increase of close to 10% in a month.

What has sparked this recent run-up? Is the rally sustainable?

Weakening US dollar

According to Angus Potter, an analyst from Allianz Dresdner Asset Management, gold's rise is seen as a hedge to a falling US dollar.

Traditionally, gold price has been linked inversely to movements in the US dollar, so if the US dollar is strong, gold prices usually drop. For the past several weeks the US dollar has been weakening, especially against the euro where the dollar hit four-year lows against the eurozone's common currency. One euro can now buy approximately US$1.15.

The dollar has been weakening due to a generally sluggish US economy, rising current account and budget deficits, and of late, the perceived welcome of a weaker dollar by US authorities in a bid to boost exports.

Mr Potter believes that attempts by the US Federal Reserve to reflate the economy through monetary policy is likely to erode the dollar value. And should efforts to revive the global economy, through aggressive interest rates cuts, result in inflation, the upturn in gold prices could persist for a while.

Gold seeing a secular trend?

Talk of deflation in the US has once again started as the economy refuses to snap out of its anaemic mode even after successive cuts in interest rates. In a deflationary environment, prices of goods and services decline to very low levels, but it can be a vicious cycle because consumers delay their purchase with the belief that prices will fall further. This has happened in Japan and it is a hole that is difficult to get out of.

With the slump in global equities, low interest rates as well as low yields from investments, investors have turned to safe havens in their search for some measure of stability in an increasingly uncertain world.

Juerg Kiener from Swiss Asia Capital, an independent asset manager, is one who thinks that gold is riding on a long-term secular upward move which could last till 2010 to 2012.

"The bull market in gold started two years ago, driven mainly by large global imbalances. Total global debt levels of over 300% to total gross national product offer great risks and volatility in an environment where there's massive over-capacity and no purchasing power."

Global imbalances, such as large savings in Asia and a large debt (and consumption) in the US, are not sustainable. Mr Kiener believes that there will be a shift from overvalued US financial assets to global resources, and a move from financial assets to real assets like gold.

He recommends that investors have at least a 10% exposure to the yellow metal.

For those who are interested in investing in a gold fund, they can consider the UOB United Gold & General Fund. This fund invests primarily in gold mining companies.