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Gold: The most happening commodity in 2008

January 03, 2008 17:42 IST

After closing out 2007 with an impressive 31.5% gain, spot gold started the new year with a new record high of $861.80 an ounce, surpassing the previous high of $850 recorded on January 21, 1980. Gold bugs celebrated the immediate returns, and remain confident the returns will continue throughout 2008 - but some near-term volatility may be in the books.

Jon Nadler, analyst at Kitco Bullion Dealers suggests investors "tread with utmost care," in the near-term as price moves may now become "highly unpredictable" in either direction.

". . . the mere fact that speculative positions are approaching a quarter of a million contracts and that the addition of not too many more of them would tilt the market into heavily overbought territory should also be in the back of the minds of latecomers to this party," he said.

Even Ned Schmidt, long-time gold bug and publisher of The Value View Gold Report, said in the latest edition of "Gold Thoughts," that today's price may be overbought, advising traders to "buy low, don't buy high!"

James Moore, analyst for TheBullionDesk.com, echoed this sentiment in an e-mailed market update today, saying the market is likely to remain "quite volatile over the next few weeks," as the various hedge funds and commodity indexes begin their reallocation process.

Last year, gold saw its seventh straight year of positive returns and best performance since 1979, when the Shah of Iran was overthrown, oil surged to record highs and U.S. inflation surpassed 13%. The average closing spot gold price of $695.85 in 2007 was the highest ever, trouncing the 1980 average price of $614.50.

Much of the same drivers exist today as the dollar continues to fall against major currencies, geo-political tensions are growing and crude oil is breaking all-time highs.

On Wednesday, the euro rose 0.8% to an intraday high of $1.4702, extending last year's 10% climb, while oil surpassed $100 per barrel, up $4.02, after amassing a gain of 58% in 2007. Spot gold rose of $23.40, finishing at $856.70 bid.

"A massive surge in crude oil to its own record of $100 a barrel and a markedly softer U.S. dollar on the heels of the ISM data for last month's industrial activity contributed to the metal's successful attempt at planting the flag on this market's Mt. Everest," said Nadler.

The Institute for Supply Management (ISM) said today its manufacturing index registered 47.7 last month, down nearly 3 percentage points from the 50.8 recorded in November. A reading above 50 indicates growth, while below 50 spells contraction.

In other news, the Commerce Department reported that spending on construction projects rose by 0.1% in November, but Nadler said "no market was going to ignore triple-digit oil and weak industrial activity."

Oil prices jumped sharply Wednesday on supply concerns sparked by renewed violence in Nigeria and on expectations U.S. crude inventories may have fallen for a seventh straight week.

The Niger Delta Vigilante Movement staged an assault on the Nigerian oil industry centre of Port Harcourt Tuesday, leaving 13 people dead, and renewing fears that Nigerian supplies could face further disruption in coming months.

The EIA's inventory report due out tomorrow is expected to show gains in gasoline supplies and refinery activity, but a decline in crude supplies. According to analysts polled by Dow Jones Newswires, data is expected to show crude stockpiles fell last week to 1.8 million barrels.

And in geo-political news, Pakistan pushed back until Feb. 18 elections that may have returned the nuclear-armed country to democracy after eight years of military rule. This follows the assassination of opposition candidate Benazir Bhutto on Dec. 27.

Moore expects gold will remain "well supported" next year with little improvement in the geo-political picture, and with the credit market still finely balanced.

Nadler said the move today suggests that funds may have made additional moves into gold "with Pakistan's situation remaining on edge and global investors obviously still nervous about financial markets."

In the longer term, Kitco's predictions indicate a likely gold price channel of $640 to $940 in 2008, with the average price possibly near $730 per ounce - 5% higher than last year's record-breaking average.

Schmidt indicated that $1,400 gold could be possible on the horizon, due to the bursting mortgage market bubble and the ensuing crisis in the banking and finance sector.

Mark O'Byrne, director of Gold & Silver Investments Ltd., forecasts gold will reach the psychological level of $1,000 per ounce in 2008, could rally as high as $1,400 and will likely finish 2008 above $1,000 per ounce.

"While this may seem like a large move it would only be a less than 25% increase in price," said O'Byrne. "Given the current macroeconomic and geopolitical climate this seems more than likely."

In the latest edition of the Gold Monitor, Martin Murenbeeld, Chief Economist of Dundee Group of Companies, calculated a probability-weighted average gold price of $860.50 for 2008 -- derived from a forecast that extends out six quarters through 2009-Q2.

"The U.S. dollar must decline further, of that there is little doubt," he simply said.

Gold futures for February delivery surged $22.10 to close at $857 an ounce on the New York Mercantile Exchange. It hit an intraday high of $864.90 an ounce, the highest for a most-active contract since Jan. 21, 1980, the day futures touched a record $873.

Crude for February delivery rallied $3.64, or 3.8%, to close at $99.62 a barrel on the New York Mercantile Exchange, after hitting $100 a barrel in early afternoon trading.

By Arrangement with www.resourceinvestor.com

Jon A Nones, ResourceInvestor.com