Fewer rush to gold in times of trouble
THE glitter of gold is always brightest during periods of stock market and currency turbulence, investment experts say.
But recent eruptions in world markets have failed to produce the spectacular returns hoped for by many quick-witted investors.
Although the US dollar was sliding against the yen last week, it was not until on Monday that the gold price reacted.
By Wednesday the gold price had jumped by US$10 to about $385 per ounce.
Christine Schaulat, manager of the Indosuez Pacific Gold Fund, said: 'We are seeing the effect of the US dollar crisis finally spilling into gold.' Anderson Cheung, director of precious metals at Swiss Bank Corp, added: 'History teaches us that it won't last long.' He expected current surge in the gold price to peak at $390.
'Hot money will not stay in bullion when markets stabilise.' The gold bullion price has been stuck in an unusually narrow trading range of between $370 and $400 for more than a year.
Every time the gold price has approached $400 per ounce it has been knocked back, mainly by mining companies selling forward and increasing the supply.
A gold dealer said: 'Whenever there is a rally, producers come in and put a lid on the market.' On the other hand, confidence in the precious metal has kept the gold price at about $370 per ounce.
Mr Cheung said: 'The downside has improved a lot.' So many factors affect the gold price that it is notoriously difficult to predict.
Mr Cheung was expecting the narrow range trading to continue this year with the price of gold staying between $350 and $400.
Traditionally, gold has been used as a safe haven in times of currency crises, political instability or rampant inflation.
If investors lose faith in paper assets, they switch to physical ones.
Taels of gold can be bought and sold through the 'paper gold' accounts offered by banks in Hong Kong.
The tael is a Chinese measure of gold used for trading on the Chinese Gold & Silver Exchange Society. It is slightly less pure and heavier than the troy ounce.
Gold unit trusts, two of which are managed in Hong Kong by Indosuez and Schroders, invest in the shares of gold mining companies.
These shares exaggerate movements in the gold price, giving investors leverage.
The recent Mexican peso crisis briefly lifted the price of gold to $385 per ounce.
Before that, Ms Schaulat said 'the last big run towards $400 was in September when it got up into the $390s'.
She said 'towards the end of the year you tend to get a spike due to seasonal demand and book squaring', explaining the December high of about $385 per ounce.
Strong demand for gold bullion in Asia has been a positive influence in the gold price in recent years.
'India and China are now much more important markets than 10 or 20 years ago. In local currency terms, gold bullion has been an excellent long-term investment for Chinese and Indian investors.' However, rising interest rates have increased the opportunity cost of holding gold.
The latest Gold Fields Mineral Services report shows that private investors sold a net total of 218 tonnes of gold last year, while they bought 321 tonnes in 1993.