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US recession fears push gold to record level

Precious metal hits US$898 and could go even higher as investors seek an alternative store of value

GOLD hit a record US$898 (S$1,286) an ounce yesterday and could reach US$1,000 soon as fears of a US recession drive investors to seek safety in the yellow metal.

A perfect storm of faltering stock markets, global economic uncertainty, Middle East tension and a free-falling US dollar is elevating gold as an alternative store of value.

That view took on even more urgency yesterday after US Federal Reserve chief Ben Bernanke hinted at more interest rate cuts, which would further weaken the greenback.

‘The probability is very high for gold to hit US$1,000 an ounce over the next three months,’ said UBS Asia-Pacific metals distribution head Stephan Schlatter. ‘It’s hard to be negative about gold, given the current situation.’

The gold rush began last year and has increased more than 30 per cent over the past 12 months. It is already up 7 per cent since Jan 1.

It did slip back to US$894 an ounce last night after reaching US$898 earlier in the day.

Ms Mae Leong, who helps manage $183.1 million of gold-related stocks in United Overseas Bank’s United Gold & General Fund, said yesterday that the uncertain times are tailor-made for the precious commodity.

‘With a generally poorer macroeconomic outlook, investors are looking to gold to diversify their assets,’ said Ms Leong.

Ms Leong added that gold prices are also typically higher in December and January, driven by jewellery demand in India and China.

Private banks here said interest in gold among local investors has been rising, whether it is in the form of simple gold certificates or more complex structured instruments.

Jittery investors around the world are so keen to have something solid in their portfolios that prices of other precious metals, such as silver and platinum, have also hit records, but these do not have the same safehaven cachet gold enjoys.

Gold is widely seen as an alternative universal currency to the US dollar. When the greenback falters, gold prospers, as is happening now.

Many experts reckon the metal will keep heading north, given the increasingly negative outlook in the global economy.

Much of gold’s recent allure stems from the gloom in the US.

Mr Bernanke’s speech in Washington made clear that the central bank believes tight credit conditions stemming from the sub-prime mortgage mess are threatening the broader US economy.

But the rate cuts that the Fed is almost certain to announce later this month will devalue the US dollar as investors will seek better returns from other currencies.

Yet those same rate cuts risk adding to inflation, and that will only further boost gold as it is seen as holding its value better against paper assets in such times.

Inflation is also not being helped by soaring oil prices.

And to complete the toxic cocktail, analysts point to geopolitical tensions in the Middle East and Pakistan.

But Mr Schlatter warned that it may not be the right time to dip your toes into the gold market, given its skyhigh price.

Still, for many people, gold is more than a mere investment.

Bank Julius Baer analyst Venkatraman Nageswaran said: ‘Retail investors can kill two birds with one stone and buy gold jewellery.

‘This way, they can keep their wives happy and make a good investment as well.’

 

Source: The Straits Times 12 Jan 08

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