Short-term volatility, long term growth expected

Overnight the price of spot gold has eased 0.7 per cent from USD1,607.80 (NZD1,914.73) yesterday to USD1,591.04 (NZD1,870.71) today.

The gold rally started around 1 July 2011 as investors turned to precious metals because of the continued debt talks in Europe. And with inflationary pressures in play, demand for physical bullion increased.

However, New Zealand Mint bullion trader Mike O'Kane says the stall in the rally should not be viewed as a pullback, but more as an indicator of the potential volatility in the market going forward.

This pullback is more an indicator of profit taking, and confidence in the resolution to the US and Euro currency issues in the short term, rather than long term changes in the growing demand for gold and silver bullion.

President Obama’s July 19 announcement of progress with debt ceiling issues, as the August 2 deadline draws nearer, is also a factor behind the fall in the gold price overnight.

From a local perspective, O'Kane says the price of gold has been steady due to currency exposure. “With the Kiwi standing at 85c [against the US dollar] again, the difference in NZD$ priced gold over the last six months has not been huge, as the same factors that are driving the gold price up are also driving the NZ dollar.

“For the past six months the price of spot gold has been between NZD1800 and NZD1900 which is at a similar point to where we were in March 2009." In the same time period, gold in most other currencies (USD, GBP, Euro etc) has reached and broken through record highs.

O'Kane says the primary drivers for gold are currently centred around currencies and that is expected to continue. The other consideration is that the resolutions currently mooted to fix these issues are inflationary, also potentially a long term factor that can increase bullion prices.

With the market outlook remaining uncertain, O’Kane predicts investors will continue to hold on to physical gold as a long term asset option because of its track record of progressive growth during the past 10 years and also its inherent anti-inflationary properties. In a decade gold has appreciated four-fold.