After reaching a five-month high this week, gold fell almost US$18 in the last two days closing at $1,166.30. In some ways, the reversal was counter-intuitive: gold typically rises amid economic uncertainty because it is seen as a haven - and global markets looked anything but safe yesterday. But investor concern about European sovereign debt had the effect of pushing up the US dollar. In addition, the US reported strong factory orders and home sales, which could indicate the economy is strengthening. The dollar advanced at the expense of gold. The metal reached its highest level so far this year at $1,192.32 on Tuesday, on the back of a 6 per cent rally in April. Even with yesterday's fall, it is still trading at about double its levels in October 2006. But gold investors may be running into headwinds.
At a conference in Dubai this week, Raymond Key, Deutsche Bank's head of global metals, said he thought gold could be poised for a major correction. Separately, Cyrille Urfer, the chief investment officer at Abu Dhabi Investment Council (ADIC), said that he thought a short-term dip in gold prices was inevitable. Strong corporate earnings are likely to push investors away from gold as they become hungrier for higher returns. It also seems likely that governments, starting with the US, will move to raise interest rates, which typically would further depress gold.
"It's almost evident that key economies, starting from the US, would be compelled to raise the interest rates, which have been purposely kept lower to trigger economic recovery ? When growth turns to normalcy, rate hikes are imminent," Pradeep Unni, a senior analyst and trader at Richcomm Global Services in Dubai, wrote in a note. And when fears over the euro zone ease, gold's lustre will diminish further. Of course, here in the UAE, lower prices can stimulate consumer demand, which is good for local jewellers. And, indeed, merchants at the gold souq at Madinat Zayed mall yesterday reported that business was strong.