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Capital Economics: Gold price is poised to drop

24 August 2009 11:02 (UTC +04:00)

Bakuâ€“ APA-Economics. Although world gold demand dipped 9 per cent in the second quarter of 2009 as the recession and rising prices hit jewellery demand, there was a sharp rise in investment demand for gold over the same period and for gold-backed exchange-traded funds (ETFs) in particular.

Figures from the World Gold Council showed that gold ETF inflows fell to 56.7 tonnes in the second quarter from a record 465.10 tonnes in the first three months of the year, but were still well ahead of last yearâ€™s inflows of just four tonnes.

But while gold traditionally enjoys a seasonal rally in the autumn and winter (because the Indian wedding season, among other things), this year the most investors are likely to have already priced in these variations.

Gold is currently trading around the $940 mark, having surpassed the psychological resistance level of $1,000 back in March this year. Historically this is high but gold bulls â€“ or gold bugs as they call themselves â€“ should beware of taking long positions in gold, whether it be as an ETF, a contract for difference or a spread bet.

With equities on the turn and potentially headed for an autumnal slump if some ultra bears are to be believed, the primary beneficiary will be the US dollar. Julian Jessop, chief international economist at Capital Economics, says that he continues to expect a stronger US dollar to drag gold down to $850 per ounce by year-end. As gold is priced in dollars, an appreciation of the US dollar will make gold more expensive to buy, especially in emerging markets such as India which accounted for 27 per cent of world jewellery demand last year.

Continued uncertainty in the economy and the markets will keep gold fairly well supported â€“ the yellow metal tends to move inversely to equities because of its perception as a safe-haven. However, the overall optimism about a global economic recovery that has been growing steadily throughout the summer ought to offset any upward effect on gold from falling equities.