Gold Prices In 2010: Possible Scenarios
By Phan Dung Khanh (*)
Stomach-churning volatility in gold prices in 2009 surprised both investors and economists. Unlike in other investment avenues, the shock waves in the gold market swept away practically everything in their paths. It is perhaps necessary, then, for institutions and individuals to try to predict possible trends in this market.
After hovering randomly around US$950 an ounce for three months, gold prices suddenly soared from US$945 an ounce on September 2, 2009, to a record high of US$1,227 on December 3, 2009. Several reasons accounted for this price hike: the greenback was on the slide; inflation was feared to surge again after several macroeconomic indicators improved; various countries, the U.S. included, injected huge amounts of funds into the economy; central banks and giant investment funds around the world actively purchased gold to add to their reserves.
However, gold prices have suddenly plummeted since December 3. Within three weeks, they dropped by over US$150 an ounce, the most dramatic fall in 2009. Many experts and organizations such as Korea’s central bank, large commercial banks in Japan, HSBC, RBS (the U.K.) and Bank of America contend that gold prices would be on the wane. They argued that the scenario in late 2009 and early 2010 would resemble that in 1979-1980, when gold prices plunged from US$850 in 1980 (which translates into US$3,500 in current prices) to US$235 on September 1, 1999. Those who purchased gold in 1979-1980 have yet to recoup half of their investments as gold prices dwindled for 20 years.
Nevertheless, three other giant banks, JP Morgan Chase, Morgan Stanley and Goldman Sachs, have offered a different forecast, predicting that gold may cost more than US$1,300 in 2010.
Whither goldprices in 2010?
Changes in the value of the greenback, which is on the rise in the short term, will exert a significant influence on gold prices. Many experts argue that the U.S. Federal Reserve (FED) will soon increase interest rates to curb inflation as this central bank and the U.S. Government have poured too much money into the economy to curtail the impacts of the recession and, in so doing, stoked inflationary pressure. An interest rate hike will make it less likely for gold prices to rise.
However, FED’s monetary policy may differ from that of other countries. FED has stopped increasing interest rates since June 2006 and slashed interest rates to fight economic stagnation since September 2007. In contrast, as part of the anti-inflationary efforts adopted by European central banks such as the European Central Bank and the Bank of England, interest rates for the euro and the pound were increasing until mid-2008. Both banks have only cut rates since the second half of 2008. Recently, FED announced that this bank will maintain low interest rates until the economic recovery is proven to be sustainable and inflation reaches worrisome levels. A rate hike, if any, will not take place soon. Neither will such a policy move immediately affect the economy.
Furthermore, technical issues also play a part. In 2009, these factors influenced gold prices several times. For instance, in November 2009, the information available in the gold market was sketchy. Oil prices fell while the dollar appreciated remarkably. At the time, the significant increase in gold prices did not depend on other factors. Once gold prices have surpassed a certain technical level, they will fuel demand from central banks and investment funds. Further price rises will be likely.
In addition, if the scenario in 2010 resembles that in 1979-1980 as some forecasts suggest, gold prices will inch up once more before entering a new period of change. Such a movement will concur with technical analyses.
The sudden drop in gold prices in December 2009 is an appropriate correction phase in line with the market equilibrium theory in finance. Under this theory, the more prices diverge from the equilibrium level, the more drastically it will adjust. For instance, after the boom in 2005-2007, the VN-Index plunged from 1,171 points in March 2007 to 235 points in 2009.
Finally, when the economy recovers, inflation returns, central banks and investment institutions continue to stockpile gold before anti-inflationary policies take effect, and technical and historical factors come into the picture, gold prices may climb again before they really fall.
(*) Head of research and analysis, VTG Financial Co.