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Gold in high fever
Gold has regained its lost lustre with a bang. Only a few months ago, when the international price was plummeting, gold's doom seemed to have been sealed. But this week, gold is riding high at $294 an ounce and the speculation abroad is that the price will touch $300, and might even rally around $330. Gold was deemed to be useless and central banks of the first world were all one in expressing their desire to get rid of stocks of the yellow metal. Successive central bank sales in the international market turned expectations against gold. The investment banks, speculators et al, went in for heavy short sales. One US reckoning is that (as on September 21) speculators had sold 65,000 plus gold futures of 100 ounces each (or 2.4 times the number of contracts bought in anticipation of a price rise). The majority had bet that gold was headed lower. But on September 26, central banks announced that they would limit their sales to 400 tonnes a year; also that they would not expand the amount of gold they lend.Immediately, the tide turned in favour of gold. There was a rush to cover short sales. The price of gold spurted.Two factors thus underpin the current bullishness: one, the central bank moratorium limiting supplies to the market; two, tightfisted central gold lending holds speculators on a tight leash (as they will not be able to borrow gold from central banks when they go short). The question is if the bull run will last. What is driving up the price is short-covering by bears, not a spurt in the intrinsic demand for gold. The bears were first egged on to sell by central bank declarations that they were in a hurry to get rid of their dead gold stocks. Now speculators have been sent scurrying for cover -- with the very central banks reversing their intent, obviously on the realisation that they had initiated a counter-productive process of declining gold unit-price. The current rush to buy gold will end sooner or later. The predicted price of $330 an ounce cannot be ruled out but it will not hold after thegold bears have taken their punishment; besides, a high price could trigger large private de-hoarding of stocks nursed abroad for over five years. The central banks will not be in the market to buy gold. After the US dollar went off gold, the yellow metal lost its role as a monetary asset. That means gold's status as an alternative to privately-held financial assets (foreign currency, shares etc) too remains stripped. The gold fever will cool, though in the short run speculation out of shares (in the US markets) into gold is possible, for quick profit. With the end of central bank aversion to gold, the reckoning is that its price will revert to around $270 per ounce, supported principally by jewellry demand. Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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