Gold derivatives trend points to higher prices, says Merrill Lynch
Source: BI-ME , Author: BI-ME staff
Posted: Sat February 28, 2009 12:00 am

INTERNATIONAL. The trend in gold derivatives market is pointing towards further rise in prices of the yellow metal, Merrill Lynch said.

“Increasing inflation expectations, a rapid increase in credit risk, falling stock markets, and a wave of monetary and fiscal policies are all contributing to fuel a rally in gold prices,” the investment bank said in a report.

“The gold options market is showing strong bullish sentiment, having developed a strong call skew in the last few months,” Merrill noted. “Climbing against an appreciating US Dollar, gold prices have some way to go until they reach their record level from last year,” the report said.

Gold touched a 11-month high of roughly US$1,000 an ounce last week on account of purchases by investors, who are seeking cover from uncertainty in the economy and volatility of equities.

The characteristic of gold as a safer asset class vis-a-vis equities, and a depreciating US dollar has driven the appetite for the yellow metal in recent months. Historically, developments in the US, such as an economic slowdown and higher inflation or a fall in interest rates there, which weakens the dollar, has always triggered a rally in gold.

Low risk assets could offer private investors the best prospects of attractive returns in 2009 as the world's leading industrialised nations face recession. With governments around the world striving to tackle the economic crisis, private investors could find value in a cautious approach towards asset allocation.

"Unlike gold, which is completely free of credit risk, sovereign bonds are increasingly being seen as risky assets even in developed markets. In markets where neither inflation products nor default protection are very liquid, gold offers a particularly appealing alternative against sovereign bonds," Merrill added.

Earlier this month, the Merrill Lynch commodity price forecast showed that gold prices can rise to US$1,100 in the first quarter of 2009 and to US$1,150 in the second quarter. While demand for gold has been rising, production has been declining. South Africa, which accounts for the major share of global gold production, is facing political issues and has energy problems.

 

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