By Kishori Krishnan Exclusive To Gold Investing News Share

We would not like to be a party pooper, but the near term risk for gold remains very much on the downside.

Throughout 2009, gold price has been pretty steady. No doubt, it ended the year 24 per cent stronger than from the start of the year, but one needs to understand the why’s and how’s of the `supposed’ bull run.

The fact that central banks were deserting the US dollar and shifting their holdings into gold brought about panic in the investing community.

An added catalyst for the surge at the end of 2009 was the Reserve Bank of India’s purchase of 200 tonnes of gold at a high.

Gold price shot through the roof. Starting the year at a London fix of $874.50 an ounce, gold rallied through $1200/oz to hit a high of $1226.60 early December. Last week, the metal was more than $140 lower at $1085.25.

Moreover, most analysts are predicting that the greenback’s slide has already finished its run. There could be a possible buy-up of US dollars, given that monetary agencies around the world are preparing for a rise in interest rates sooner than expected.

And if this happens, and the US dollar takes off in the New Year as nations attempt to anticipate the expected rise in interest rates, gold is bound to hit terra firma.

Silver and platinum prices too might follow.

Sorry to be the bearer of bad news, but the fact of the matter is that the gold price has been held hostage by the strength of the US dollar. And that despite holding promise that it would enter the new decade by posting fresh highs, the gold bull’s reign has clearly been secured.

End of decade

On December 31, gold futures rose, capping the ninth straight annual gain. Gold futures for February delivery climbed $3.70, or 0.3 per cent, to $1,096.20 on the Comex division of the New York Mercantile Exchange.

“Gold is my favorite because it’s real and honest money,” said Michael Pento, the chief economist at Delta Global Advisors Inc. “It prospers in an environment where there’s currency depreciation.”

But check out this report by Resource Capital Research (RCR) in its RCR Gold Company Review for the December quarter 2009 – “There is a high degree of speculative momentum buying behind gold’s recent surge, and without support from demand fundamentals the near-term risk for gold at the moment remains very much on the downside. For that reason, we are cautious on the medium term outlook for gold, and expect it to trade down from current overheated levels, into the $1,000 to $1,100 an ounce band in the next six months, with periods of US dollar weakness likely to produce short term rallies,” notes RCR.

As for the buying by central banks, RCR has said that such a sustained move “was not realistic” given the liquidity of physical gold markets and also given that central banks are inherently conservative ‘value purchasers’ and unlikely to be aggressive buyers of a supposedly ‘safe haven’.

The inherent risk in buying the yellow metal at this point also explains what funds, dedicated to the metal, are doing. An official of BlackRock Gold and General says meaningfully, “While we have always believed gold should be a small part of a diversified portfolio, we did not want to see widows and orphans put their life savings into it.”

Don’t miss the cautious underpinning of that message.

Wither 2010?

Analysts say the outlook for 2010 depends very much on whether US interest rates start to rise, which could lift the dollar and consequently knock gold.

Not to forget the fact that cash-based markets such as precious metals are likely to experience inflation as record amounts of new money have been printed during the past year.

There are optimists though. BBC’s business editor Robert Peston says: “If we are in for a period of slow steady recovery, in which interest rates rise, gold is greatly overvalued. But if the dollar and sterling were to plunge – well, gold would glisten even more than it has.” Which way things fold is anyone’s guess.

So, for the first week of the new year, we think gold will continue to correct its position. You have been warned.

Questions about this article? Leave a comment below or contact our editorial team at editor@resourceinvestingnews.com.