Central Banks Boost the Gold Price

The outlook for Gold Prices, buoyed by central-bank monetary policy…

EXPANSIVE MONETARY POLICIES by central banks worldwide have improved the long-term outlook for commodities, says Commodity Online – led by precious metals such as Gold Bullion, as well as soft commodities.

According to a research report by Credit Suisse, the latest rally in commodity prices was driven by central-bank policies, Chinese strategic buying of key resources, and short-covering by speculative traders. Gold Prices rose in the past few months, mainly driven by safe-haven demand amid the global financial and economic crisis. While this demand supported prices, it also generated risks, some of which materialized – with safe-haven investors taking profits, resulting in a price decline.

The softening of prices gave the physical gold market much needed breathing space. Moreover, such price dips should create good entry opportunities for longer-term oriented investors, the Credit Suisse report states.

“A shift by central banks across the globe towards quantitative easing will lend support to commodity prices over the longer term. However, investors need to adopt a highly selective investment strategy and favor commodities that are less dependent on the economic situation,” Eliane Tanner, commodities analyst at Credit Suisse said.

Stressing a selective approach to commodity investments, Tanner said the downside risks for commodity prices remain fairly elevated in the absence of a clear sign of re-acceleration of global economic growth. The latest move by the US Federal Reserve is unlikely to fuel a sustained recovery for the asset class as a whole.

“However, correlation between commodity markets, which increased sharply during the crisis, has started to lessen. This indicates that the general sell-off across markets regardless of fundamentals is coming to an end. The sector will see a lengthy consolidation phase before the uptrend can resume. Precious metals and soft commodities should be the first markets to recover. A weaker US Dollar, low real interest rates and rising inflation expectations should benefit Gold Prices.”

The report cited soft commodities as another interesting segment, which is likely to see an increase in prices. This is due to the possibility of farmers planting less, following low prices last year. As last year’s record crop failed to replenish inventories, prices will have to rise to encourage more production.

In the oil market, crude prices surged amid improvement in risk appetite. However, the market is still suffering from large inventory overhangs, the report said. In the base metals segment, most markets are oversupplied and inventories are increasingly rapidly. Thus, a further decline is expected, it added.

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