Why Gold Investors Are In For A Bumpy Ride

Date 15/08/2008

The Right Side

Erin Hamilton

Tbilisi, Georgia

It was soul singer Edwin Starr who asked (and answered) the following rhetorical poser:

"War. What is it good for?"

Starr’s conclusion was that war is good for "absolutely nothing". If events of the past week are anything to go buy, the price of gold can be included in the all-encompassing "absolutely nothing" category. It continued to slide as Russian tanks rolled into South Ossetia, and kept going after President Medvedev called a halt to military action.

I’ve been observing events — both the war and the action on the gold market — from Tbilisi, the Georgian capital.

As the Russians advanced, frightened Georgian women were taking comfort from their jewellery boxes.

Georgians prefer the dollar to gold

No one, however, has been adding to this store of realisable wealth. Rather, the dollar is back in favour as the safe haven asset of choice. First wallets are being stuffed full with local currency to fill the car with petrol, stockpile food and for airfares (when the airport reopens). Then dollars are being stashed away for future needs.

In 2008, gold in any quantity is just too cumbersome. It is also too expensive. And too volatile! Ask any woman in Georgia’s capital, Tbilisi. First the price shot up. Now it seems to be falling at the rate of knots. This doesn’t exactly inspire confidence...

That’s why their husbands are locking dollars — and not gold — in their safe boxes.

Demand, both from jewellers and investors, has taken a hit

Outside this crisis region, where ready cash is less of a priority, others too are shunning gold. India, a gold mega consumer, has seen a heavy fall in buying. The latest World Gold Council figures show that jewellery and investment demand there dropped by a whopping 45% between April and June. Demand also fell in the other traditionally heavy gold buying areas of Turkey and the Middle East. For weeks, Asia’s traders had been warning that the price volatility was bad for business. The price has, after all, tumbled from over $1,000 earlier in the year down to less than $800 an ounce.

Western jewellery buying has, says the World Gold Council, also fallen. This time because of threatening recession. "Deteriorating conditions in across many economies .... acted as a further barrier to spending on gold jewellery," its latest quarterly report says.

The speculators are running scared too!

Even speculators seem to be abandoning gold (along with other commodities) amidst the dollar’s resurgence. "The speculative element is coming off," admitted Jill Leyland, economic advisor at the Council’s London office. Hardly surprising when the Central Banks had been talking widely of selling gold to help the dollar...

In their current pessimistic frame of mind, gold bugs also fear a rise in gold output. This is despite the fact that output actually fell by 4% in the last quarter. Australia, South Africa and Indonesia all saw lower production.

More volatility ahead

Gold’s price volatility is expected to continue. Why, after all, should it be any different to all the other markets which are wildly swinging around?

Barclays Capital’s precious metals analyst, Suki Cooper, puts the price range for the rest of this year and 2009 at $800-900.

The scaremongers are not yet predicting the big doom scenarios — a collapse to 2007’s $600 an ounce, or even 1999’s $250. But investors remember those levels. They know how bad it could get...

One thing we can be sure of — it’ll be a bumpy ride. Keep your courage!

Erin Hamilton

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