Gold Investments Market Update – Geopolitical Risk Escalates and Will Lead to Further Safe Haven Demand

Gold has commenced the New Year as it did in 2008 – up sharply in early trading before selling off somewhat. Gold surged (along with oil) on the open in Asia on geopolitical concerns with the Israeli military offensive against Gaza escalating. However, with oil giving up some of its earlier gains and the dollar stronger against most currencies so far this morning, gold has given up its earlier gains.

The reemergence of geopolitical concerns in the Middle East (and with Russia) is likely to see gold well bid in the mid $800s/oz. In recent years, geopolitical risk has been greatly underestimated by the financial markets and it continues to be today. Overnight, an Iranian military commander has called for an oil boycott over Israel’s offensive in Gaza. Tensions throughout the Middle East should not be underestimated and this is a serious development that bears watching. As is OPEC’s compliance with oil output cuts and the Russian gas supply row which has ramifications for fuel dependent western economies.

Besides geopolitical risk, unprecedented macroeconomic risk remains and allied to that is increasing monetary risk as the Federal Reserve and central banks internationally embark on zero interest rate polices (ZIRP) and an unprecedented monetary easing that could see a swift shift from deflation to a very sharp inflation or stagflation in the coming years and possibly as soon as in 2009 itself.

Gold demand in India has fallen quite sharply in recent months as the price sensitive Indians have stepped back from the market. This is no cause for alarm as the Indian market has done this throughout the bull market since 2001. They are smart buyers and continue to buy on pull backs and corrections in the price.

Indian gold futures MAUc1 gained more than 29 percent in 2008 and hit an all-time high of 14,320 rupees per 10 grams on Oct. 10 as investors, concerned by the deepening global financial crisis, sought safety in precious metals. Gold remains near record highs in rupee terms (as it is does in all major currencies – see chart and chart page above) and this is currently curtailing demand in the world’s largest consumer. However, western and international investment demand for coins and bars, certificates and exchange traded funds is increasingly becoming an equally powerful force in the gold market and is resulting in physical gold demand remaining very robust despite the fall in demand from savers and investors in the Indian sub continent.

Also demand from Russia, Brazil, the Middle East and many other emerging markets including most importantly China is increasing every year. This is an important big picture trend that is will become an increasingly important fundamental driving the gold market in the coming months.

Mark O'Byrne

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