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When gold’s war premium goes, can it win the peace?

When gold’s war premium goes, can it win the peace?

Middle East offers a boost for now; Gold to profit until central banks raise rates.

March 3, 2011 3:14 by

The bullion price’s leap to record highs has been fuelled by the fear factor stemming from uprisings in the Arab world, but once calm is restored, gold’s battle with the world’s central banks begins.

In the six weeks since tanks rolled into the centre of Cairo to quell protests that deposed former Egyptian president Hosni Mubarak, gold has risen by nearly 10 percent to hit a record $1,436.40 an ounce on Wednesday as investors weigh up the likelihood of an oil price shock to the global economy.

Without the push for democracy sweeping North Africa and the Middle East that propelled oil above $110 a barrel to 2-1/2 year peaks, there was a strong argument bubbling in early 2011 that the global recovery was gaining traction and inflation was accelerating to warrant the developed world’s central banks raising interest rates.

Now, investors are a lot less certain about the outcome of these increasingly bloody protests, which have eclipsed the prospect of gold-denting rate rises.

“Essentially, moving into gold, or silver, at this moment, is more about a play that events in the Middle East are going to deteriorate rather than get better,” said RBS global commodities strategist Nick Moore.

“Prior to this event, gold was already richly priced … but because every day seems to bring fresh horrors in Libya, one can’t rule out that there won’t be some maniacal event that drives gold higher,” he said.


Investors often buy gold to protect their portfolios from the ravages of inflation. But when price pressures build enough to trigger a response from a central bank, gold can quickly switch from being a blessing to a non-yield bearing curse.

There is no doubt that record food prices and soaring energy costs are whittling away at consumer purchasing power and investor returns, driving real interest rates — a benchmark rate minus inflation — deeper into negative territory.

The lower the rate of interest, the greater the support to gold, which bears no yield of its own and therefore gets sidelined for stocks, high-yielding currencies and bonds when rates rise and returns improve.

BlackRock, which manages a total $3.6 trillion and is a major investor in gold and gold equities, said in February the key threat to the bullion market is “an increase in real interest rates. When these begin to rise, the opportunity cost of holding gold will encourage investors to sell the metal.”

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