Sunday, January 6, 2008

Bullish on gold bullion

By Javier Blas
Published: January 4 2008 02:00

As Soviet tanks rumbled into Afghanistan in January 1980, panicked investors sought refuge in the ultimate safe haven, gold - boosting bullion prices to a record $850 a troy ounce. At the same time, oil prices were shooting up, driven by instability in the Middle East, and the dollar, amid fears of a US recession, was falling dramatically.

Fast-forward 28 years and all appears roughly the same. Again, trouble in south Asia - this time, the assassination of Benazir Bhutto in Pakistan - has pushed gold to a new high above $860 an ounce this week. Once again, oil prices and fears about the US economy and the direction of the dollar are supporting the move.

The similarities end there, however. In 1980, after a surge from $400 to $850 in just five weeks, bullion prices collapsed to trade as low as $300 a year later. But since then, fundamental changes in the gold market have taken hold that suggest higher prices might last a lot longer.

David Davis, analyst at Credit Suisse Standard Securities in Johannesburg, says the dynamics have begun to change "inexorably towards a diminishing supply of gold and increasing investment demand, which will ultimately impact on the gold price".

This time, the price surge has been slow and fairly constant since a low in 1999 of about $250 an ounce and support has come not only from gold's status as safe haven. Fundamental factors identified by analysts include strong jewellery buying by the rising middle class in emerging countries such as India; investors' long-term interest in gold as a hedge against persistent dollar weakness; and falling output in South Africa, the world's largest gold producer.

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