Investors switch to precious metals

United Arab Emirates: Wednesday, May 21 - 2008 @ 09:26

They also sell up on local bourses and this year seems no exception to the rule. But instead of putting the money in a deposit account, precious metals are likely to be the resting place for this cash.

There is plenty of logic in this move by regional investors. Gold has corrected from its March 17 high of $1,030 back to around $900, and yet the price of oil has soared higher and higher, hitting $128 this week.

There is a correlation between the oil price and the price of gold, up to 90% depending on your mathematical model. A simple way to look at it is that you should be able to add a zero to the oil price and get the gold price.

Therefore gold should be trading at around $1,280 an ounce with the oil price at its current level. At $1,030 an ounce just two months ago, gold was heading in that direction.

The fundamentals of the oil and gold prices are not dissimilar with a very tight supply/demand position and heavy speculation by hedge funds.

Hedge funds

At this year’s Hedge Fund World a manager from the Superfund told AME Info he was a buyer of gold below $850 an ounce, and it was noticeable that gold only briefly dipped $2 below this value before rebounding strongly to current levels.

Veteran gold trader Jim Sinclair says gold may take three attempts to clear $1,000 an ounce (one try is already done) and will then quickly head for $1,200, a straight $300 profit. That is probably the most likely explanation for enthusiasm among the Arabian investment community as the summer approaches.

But the wisest may chose silver instead. In past financial crises silver has always performed ahead of gold, albeit with greater volatility, and delivered twice the return. At $17 an ounce, silver looks cheap against its March high of $21 and usually follows gold upwards.

What brought the precious metals off their March peak was a resurgent US dollar. But the dollar has been looking weaker over the past few days and this was likely a false rally.

Dollar fundamentals

Again fundamentals are in play as the lax monetary policy of the Federal Reserve is hugely increasing the money supply, which can really only result in further dollar weakness, global inflation and higher commodity prices. The supply of precious metals is pretty much fixed so gold and silver will rise in price as the money supply expands.

Finally, while we might be half-way through the current financial crisis – and typically they last three years – there is still the second half to come. With inflation on the way up that could well mean a bond market crash as interest rates head back up, and a stock market crash as profit margins are squeezed by inflation and a recession. Then we will get a true market bottom.

And if the financial crisis gets worse then one solution under discussion is the replacement of the US dollar by the Amero – a new currency to include Mexico and Canada – and backed by gold.

But there is not enough gold available to cover present dollars in circulation, unless gold was to be valued at $5,000 an ounce.

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Wednesday, May 21- 2008 @ 9:26 UAE local time (GMT+4) Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Mediaquest FZ LLC.

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