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With the dollar so strong can we really see gold holding more than $1000 an ounce?
Mr K C Ong, London

Suki Cooper: Gold’s legacy as a monetary asset and with key consumption being outside of the US means there is a positive relationship between the dollar and gold prices. A weakening dollar would certainly appear to be broadly supportive of an uptrend in gold prices, but the converse does not necessarily hold true. In the past, a strong dollar has not necessarily prevented gold prices appreciating.

Although the gold/dollar relationship is strong it is not one that will unquestionably cause an equal and opposite reaction. History shows this relationship tends to weaken during periods of dollar strength, and the relationship becomes stronger during periods of dollar weakness. Back in March 2008, when gold prices breached the $1000 level for the first time, the dollar had hit record lows against most major currencies as well as inflationary concerns being ripe.

This time, gold prices have rallied despite the traditional drivers not being supportive. Instead this rally is being driven by safe haven buying in light of concerns over the broader economy. Investor demand has been tremendously strong. In our view, prices are more likely to make a sustained move above $1000 in the second half of the year in line with our expectations for the dollar to weaken against the euro.

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At what point will gold become less attractive than other asset classes?
Vish, unknown

SC: Given its dual role as a commodity and a monetary asset, gold prices tend to flourish in an environment that is supported by its fundamentals and the external environment. Thus if its underlying physical market balance is in excess surplus and there is not sufficient investment demand to soak up that excess, prices would come under pressure.

Investors buy gold for many different reasons, as a dollar hedge, equity hedge, hedge against market uncertainty, inflation hedge, and as a safe haven asset to name but a few.

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To what extent do you believe the current gold price is reflecting investor sentiment or do you believe that fundamental demand is the primary driving force?
George Playle, London

SC: So far this year, we have seen signs of mine supply stabilising, but jewellery demand weakening. In contrast we have seen a surge in investment demand, whether we are looking at paper exposure, ie futures or physical exposure ie bars, coins and physically backed ETPs (exchange traded products).

To date the growth in investment demand has been more than sufficient to offset the decline in jewellery demand. In our view, this rally lies firmly in the hands of investors. Sentiment remains positive towards the metal. Speculative futures positions continue to hover around 5 month highs and inflows into the physically backed ETPs in the first two months of this year exceeded inflows for the entire year, last year. Inflows in February doubled the previous record which was only set in January.

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If one accepts the notion that world economies and currencies are in a slow but long-term decline, should we expect silver to continue to rise as a safe haven or will its reduced demand in industrial applications pull the rug out from under it?
Tim, Virginia

SC: Much of silver’s uptrend has been fuelled by gold’s positive performance rather than its own fundamentals. The gold-silver ratio shot up from the mid-50s at the start of 2008 to over 80 towards the end of the year. Compared to a long-run average of around 60, current levels would imply silver is undervalued whereas gold is overvalued.

However, the fundamental outlook for silver has deteriorated. Photography and jewellery demand for silver has been on a downtrend in recent years, but taking into consideration downward revisions to global GDP growth, the outlook for industrial demand is also set to remain weak over the forthcoming months. In turn, the underlying supply and demand outlook for silver looks set to remain unfavourable in 2009.

The real driver of silver prices despite its poor fundamentals has been the tremendous growth in investment demand as investors have built exposure to silver as a cheap proxy for gold.

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How much refined silver is there above ground versus above ground refined gold in the world and with the Gold:Silver Ratio at nearly 70:1 ($910/$12.77) do you think that silver is a better option than gold?
Mark O’Byrne, Executive Director, Gold and Silver Investments Limited

SC: In terms of above ground stocks the gold:silver ratio would be around 4:1. In our view, the fundamental outlook for gold looks more favourable in comparison to the fundamental outlook for silver.

Although gold jewellery demand has suffered in light of higher prices, investment demand has been able to offset this. Despite higher prices, the gold supply response has been rather muted. We expect total supply from mine output, official sector sales and gold recycling to fall year-on-year.

In contrast, we expect modest growth in overall silver supply, this combined with the deterioration in demand for key end uses of silver, means excess surplus is set to grow y/y. In turn, should we start to see net redemptions in the build of investor interest, silver could be exposed to further downside risk, in light of its weaker fundamentals for prices to fall back on.

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Media discussions of gold price trends usually centre around growing investment demand. However, most of the demand for gold comes from use in jewellery, and this pillar has been falling. What’s your perspective on the dynamic between rising investment demand and falling jewellery demand - which trend is going to win in the end? Can investment demand for gold keep growing over the medium / long term at a rate high enough to outweigh the falling jewellery demand? To what extent can gold’s store-of-value nature topple its jewellery-commodity nature?
Bill Mill, unknown

SC: At least for now, the growth in investment demand has been more than sufficient to offset the decline in jewellery demand and the slowdown in producer hedge-book buybacks. But traditionally jewellery demand (which normally makes up around 70 per cent of demand) has tended to provide the floor to prices, physical buyers return to the market as prices ease and provide a cushion.

Low and stable prices are the most favourable for key jewellery consumers but even in an environment of higher prices, demand tends to return to the market as price volatility eases. However, as this end use has dried up in light of higher prices, that floor is yet to be tested. The rally is dependent on investment demand, in our view, the drivers to support investment demand are set to remain positive throughout this year. Longer term, should the investment demand turn less positive, prices will once again be dependent on jewellery demand to provide a floor.

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When the the worlds appetite for risk returns it is assumed that the US dollar will come under pressure as capital flows back to risk assets. In this environment will gold resume its traditional inverse relationship to the dollar or will gold fall in conjunction with the dollar as it has recently benefited from the flight to safety as well.
Elton Crowder, Seattle WA

SC: As mentioned previously the gold/dollar relationship tends to weaken during periods of dollar strength, and the relationship becomes stronger during periods of dollar weakness.

In our view, those investors who choose to hold gold as a currency hedge are likely to return to the market as the dollar weakens. In turn prices are likely to receive a boost as a specific purpose hedge as well as continuing to attract safe haven buying.

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Some very smart people are saying that the gold ETF’s are really paper gold holders and that there is little or no physical gold in their own warehouses. What does this mean?
David Branch, Sedona, AZ

SC: Not all gold ETFs are physically backed, the underlying for some of the products is allocated gold, unallocated gold or even futures. Those that are physically backed, do say on their websites that they hold allocated gold.

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I understand that gold acts as a safe haven, even though it has few industrial uses, because it is relatively scarce. I gather platinum has more industrial uses and is even scarcer, yet it is not seen as such a safe store of value as gold. Why is that?
Ian Centis, unknown

SC: There are a number of reasons, although platinum is also a precious metal, it does not have a legacy as a monetary asset. Industrial demand makes approximately 80 per cent of total platinum demand yet only accounts for around 10 per cent of total gold demand.

Gold plays a dual role as a commodity asset and a monetary asset, and safe haven buying has supported gold prices, but the two metals have very different dynamics at play. Platinum has on occasions benefited from positive sentiment across the precious metals, but platinum prices move more in tandem with its supply and demand dynamics.

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We’ve seen gold rise during this financial crisis reinforcing its safe haven status despite a sharp drop in demand in markets such as in India. However, do you think that the price will continue to be at elevated levels as the recession deepens and investors shun every asset class except cash?
Nandan, unknown

SC: There is potential for a correction in the near term, as the investment horizon of new investor demand is tested. Thereafter we would expect renewed investment demand to buoy prices as investors return to the market turning to gold as a dollar hedge or an inflation hedge; in line with our expectations for the dollar to weaken against the euro on a 12-month basis, and deflationary concerns to give way to inflationary concerns as well as broader safe haven buying.

The factors which boosted prices to $1000 the first time round and the factors that boosted prices to $1000 this year are likely to combine to create a gold favourable environment.

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Some economists say that we are heading for a period of high inflation, a point of view I agree with. If that is the case, Gold is clearly a good investment. However, there are many ways to invest in Gold, such as coins, ETFs, mining stocks etc. Which one is the best?
Niels Nielsen, Monaco

SC: Gold is sometimes bought as a hedge against inflation, but it is far from a perfect or dynamic hedge and may need to be held for longer periods to be effective. Many studies show that gold can be a leading indicator of inflation but this strategy should be implemented with caution as gold provides a leveraged return.

In terms of gaining exposure, this depends on whether one is seeking exposure to the physical asset, in which case storage costs, insurance and security are some of the factors that need to be taken into consideration. Whereas investing in stocks does not give you access to just the underlying gold prices, but also other factors that will impact the share price.

Depending on which ETF is chosen, this can be a way of gaining exposure to gold without having to store and insure the metal.

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Could you please compare the gold with other precious metals such the platinum and palladium in terms of investment attractiveness in 2009? What would be the best investment strategy in precious metals in 2009?
Viktor O. Ledenyov, Ukraine

SC: Although the precious metals complex can move together, the fundamental outlook for the metals is set to vary significantly. The outlook for platinum and palladium looks weak in the near term as the bulk of demand (over 50 per cent) is centred around the auto industry. We expect the platinum market to be in a modest surplus this year, as falling demand has been matched with curtailed supply. The surplus is likely to be concentrated in the first half of the year with vehicle sales falling in key platinum markets. Platinum is primarily used as a catalyst in diesel markets, and although diesel vehicles make up a growing share of the market in Europe, total sales have fallen. In terms of supply, we have seen cutbacks in response to lower prices, but platinum stocks remain close to historical lows, providing a deflated cushion should further production cuts start to emerge. Even though the supply side remains supportive, a recovery in demand will determine whether prices start to recover slowly or encounter a sharper pick-up.

We expect palladium’s fundamentals to remain weak, given the bleak outlook for demand (palladium is primarily used in gasoline vehicles, with the US being a key market), but particularly due to above-ground inventories also remaining high. Strong investment demand has been a key supportive factor for palladium prices, and in the near term remains key for prices.

The outlook for silver looks set to deteriorate further in 2009. Mine supply is set to grow, despite some lost production due to cut backs in base metals production; most of the new supplies stem from the start-up of primary silver mines. The market surplus is exacerbated by the industrial demand that is set to tumble due to the weakening macro-economic environment.

Gold on the other hand, has seen a surge in investment demand that has offset the weakness from the jewellery sector. If this investment demand continues to grow, the market could be in a physical deficit this year. Both gold and silver prices are dependent on continued growth in investor interest boosted on the back of safe haven buying while the PGMs are more dependent on a turn in industrial demand.

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What do you believe will be the greatest pressures that will force commoditiy prices to rise, and what indicators should we observe to help us make this determination?
Cliff, California

SC: There are key factors on both the demand and supply side from where the greatest pressures that will force commodity prices to rise can come from in our view. One key factor has been the supply side which has been hit by a combination of declining prices and still sizeable input costs. There have been numerous projects across the metals, mining and energy sector which have been delayed or cancelled owing to tight financing conditions.

From the demand front, a more positive global economy will lead to increased commodity demand and pressure prices higher especially with the constraints faced on the supply side. China in particular has been key in commodity demand growth. However an up tick in economic growth will not mean the outlook for all commodities will be positive, as always it will be important to distinguish between individual commodities as it is specific underlying demand and supply dynamics that drive prices.

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Warren Buffet said today that digging up gold from the ground in one part of the world and sticking it in the ground in another and pay custody fees for it is a bad idea. An investment in Coca Cola pays you an income stream, while gold pays nothing. He went further to say that if the choice is between a goose that lays an egg everyday and a goose that does not lay any eggs, he would prefer the goose that lays eggs. In view of what he said what are your views on holding gold as an asset class/hedge against value of paper money?
Rizwan Ahmed, Belgium

SC: There is a market to lease gold based on the Gold Forward rate but investors looking to earn a positive return through a buy and hold strategy will be for absolute appreciation. Historically, gold has proven to be effective as a long term inflation hedge, a hedge against market uncertainty, it also has a strong negative correlation with the dollar - so can be an effective dollar hedge.

As a safe haven, gold’s job isn’t necessarily to provide capital appreciation but to provide less volatility and add stability to a portfolio. Although volatility has risen across the board recently, gold volatility remains low compared to other asset classes. The correlation between gold and leading indices flits between positive and negative territory, i.e. remains uncorrelated.

Gold prices tend to follow a different trajectory to equity and bond markets. Gold prices and equity markets can move in opposite directions as investors switch asset classes but they can also move together as gold returns are liquidated to meet margin calls elsewhere or amid broad risk reduction. Since July 2007, marking the start of the sub-prime crisis, the two have notably diverged. In the past, gold has shown a low correlation with the equity markets. For example, during the 1987 stock market crash when the S&P 500 fell by over 20 per cent on Black Monday, gold prices closed 3 per cent firmer and were fairly stable in the proceeding weeks.

Similarly, during the 1998 emerging markets/LTCM crisis, gold prices were relatively steady, while equity market volatility increased. Indeed last year, gold was one few assets that could still be liquidated to meet margin calls elsewhere.

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