Gold Prices – Poised for a fall?

The yellow metal is seen as a safe invest against runaway inflation and a falling US dollar. However, skeptics concern that the yellow metal has gone too high, too fast and a serious correction could be round the corner.

From the time when the global financial crisis started (2007), gold continued its safe heaven status for many people. During the last couple of years, real estate stagnated and most currencies lost their value, while the prices of gold rose to the sky and became a favorite among the investment community. Now with the emerging signs of inflation creeping in, the yellow metal even becoming more admired as investors reflect on safety and looking for the best way to hedge against inflation.

It is well known fact that during the times of war, falling currencies and inflationary pressures, gold is always the popular safe haven. Thus the yellow metal is not only a currency for the elite, but it actually holds real worth, unlike the US paperback dollar whose value can fluctuate as wildly as we have seen during the last couple of years.

But on the other hand, skeptics feel that the yellow metal has gone too high, too fast and a serious correction could be round the corner. We have seen global bullishness of the yellow metal in 2010 – as prices soared 30% from January 2010 to their December peak. But as prices dissipated in recent weeks, analysts say the short-term deliberate interest has turned more negative towards gold driven by improved sentiment on the US economy recovery and the concerns over euro zone sovereign debt abating. Amidst this, analysts at Citi rated their gold price outlook downside with sings of the past three years’ risk-trade frittering away and as resilience is apparently restored in the developed markets.

Nevertheless, turmoil in Egypt would not have come at a better time for gold. Moreover, the growing demand from Chinese New Year celebration (the largest consumers of late) and growing geopolitical risk has provided a new support.  The US-based Donald Trump, the largest high profile investors who openly argues his bullish outlook on gold and strongly condemns US policies said in an interview recently, “I think gold will go up as long as people don’t have confidence in our president and our country. And they don’t have confidence in our president.”

Analysts foresee that a bit of downward pressure in the near term, but as economic woes continue to drive investors into safe-haven and thus the prices of yellow metal will be headed higher in 2011. However, think a while, is the latest gold craze is way overcooked? It remains to be seen whether the yellow metal may loose some of its appeal as a safe heaven in 2011.

Jany, Lead Economist