Despite the recent coordinated measures across the world to calm the market, the global liquidity crisis is nowhere near its end. Moreover, with higher gold lease rates, the yellow metal is trading in parity with money-market rates and increasing its appeal. All this suggest that flight-to-safety will still be the main driver of gold prices for some months to come and the yellow metal could revert to $1,000/oz in the process.
As US fiscal and trade deficit becomes unmanageable, the weaker dollar could then help gold break through $1,200/oz.
While comparing the fall of commodity prices due to the credit crisis, only gold held on so well, mainly on account of the risk premium.
There is a good chance that the monetary easing will be overdone. Consequently, the world may face serious inflationary pressures later if the current policies are successful in avoiding deflation. The recent bailouts are inflationary and may result in more money chasing commodities. In turn, the combination of higher cost of money and higher input cost inflation could push crude oil up to $100 per barrel.
The lack of investment in supply infrastructure has been the major force behind the current commodity super-cycle. As emerging market economies go back to their long-term growth trends, they will do so in an environment with severe supply bottlenecks. In fact, even considering the recent selloffs in commodities, gold prices are still cheaper in relation to oil prices. Therefore, gold prices could appreciate strongly in order to keep its historical relation with other commodity prices.
(The author is the Director, Commtrendz Research)
