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By Kishori Krishnan Exclusive To Gold Investing News
U.S gold futures slipped early Thursday as some investors unwound their safe-haven play when the dollar strengthened and equity markets firmed, following positive earnings news and improved economic prospects. Gold for June delivery GCM9 lost $6.50 to $879.40 an ounce on the COMEX division of the New York Mercantile Exchange. Gold had set a record of $1,033.90 on March 17, 2008. This year’s high of $1,007.70 was reached on February 20.
 According to analysts, optimistic investors read many recent commodity price gains and positive economic readings as an end to the downturn and are starting to unload safe-haven gold. What added to the melee was a firmer dollar, that also weighed on gold prices.
Earlier on Wednesday, gold rose for a second straight day in New York, as some investors purchased the metal to hedge against financial turmoil. Silver also gained. The U.S. Treasury Department extended last year’s taxpayer-funded bank bailout to life insurers. Earlier, the bailout was broadened to include automakers and credit-card companies.
“The reasons why investors bought gold — fears of longer-term inflation and currency debasement – remain intact,” John Reade, the head UBS AG metals strategist in London, said in a report. Once gold prices have stabilised, “we expect bottom-fishers to begin the next cycle of investment,” he said.
There’s short covering going on. Speculators purchased the metal to cover positions intended to produce gains if the price fell, said Marty McNeill, a trader at R.F. Lafferty Inc. in New York. “People didn’t expect gold to run up after the sharp decline, so you have some short covering today,” McNeill said of Wednesday’s trade.
Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong, said the economic outlook also appeared better after the G20 summit and some economic data, which was also denting precious metal demand. “There’s less panic, everything seems to be stabilising a bit more,” Leung said. Traders added that gold was unlikely to move much ahead of the Easter holiday weekend.
Sigh of relief
Early in the week, precious metals researcher GFMS Ltd. provided the necessary fillip, by stating that gold would surpass last year’s record on speculation that inflation would accelerate, fueled by government programs to bail out failing banks and ease the recession. Since the second quarter of 2007, banks have reported almost $1.3 trillion in credit losses and writedowns related to the financial crisis.
As investors seek to guard against rising inflation, gold price could rise to a record above $1,100 an ounce in the coming months, the GFMS added. In its annual gold survey, the researcher “cautioned that it may well not be a straight-line rally as a summer lull, or the need for inflationary pressures to build could mean sub-900-dollar prices in the short term.”
According to GFMS’ executive chairman, Philip Klapwijk, gold investment is likely to rise sharply in 2009, taking up the slack caused by an expected double-digit drop in jewellery demand. In an interview to Reuters, he said: “There is no reason you couldn’t see more like $40 billion going into the market (this year). That is still a pretty small chunk of change compared to the flows you see going into mainstream assets.”
He added: “Conditions are very propitious for gold investments. We are going to see, after a bit of a lull, investment demand come back with a vengeance.” Demand for physical gold and gold-backed exchange-traded funds has been strong as the financial crisis knocked faith in paper assets. This is likely to continue in 2009, Klapwijk added.
“The drive shifted a bit away from speculative interest towards wealth preservation in the course of last year, and that has tended to be the case again this year,” he said, adding, “Wealth preservation is the number one objective, rather than capital gain.”
Now for the dampner. Global gold mine supply contracted by almost 3 per cent in 2008 resulting in production levels falling to a 12-year low. Indonesia output decreased by 35 per cent, South Africa, 14 per cent and Australia 13 per cent, according to the GFMS’ Gold Survey.
In Indonesia, production fall was largely associated with mine sequencing leading to the extraction of low gold grade ores at Grasberg. In South Africa, safety related stoppages, and lost time relating to a force majeure announced by Eskom, the state electricity provider in January 2008, were both accountable for a large measure of the shortfall.

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