Manifestations of the global economic crisis began to unfold in early October 2007 and since then the crisis has been affecting the economies of most countries of the world. It crushed more than 30 trillion dollars of market value of listed companies in the financial markets, according to estimates of the International Monetary Fund. Banks have lost more than 1.2 trillion dollars divided between losses, writing off of debts and the so-called toxic assets. The International Monetary Fund has warned that losses could reach 2.2 trillion dollars while some people indicate that it could exceed that amount by a great extent. International trade has lost 45% of its value until the end of 2008.
Relative improvement in the U.S. markets and share coherence of some large companies may be explained by some as the calm that precedes the storm. I might agree with that analysis, but I believe that this calm does not lead to the end of the storm, or even keeps it as it is.
We need more time to see real signs of improvement.
Some results of the crisis
Although the crisis has not ended yet, we have to diagnose its results and facts and what it could produce in the future. Waiting for the crisis to end and then analyzing the outcome would be too late.
There is a long list of facts produced by the crisis. I would like here to focus on two key facts: The first is that markets of all forms, whether shares, commodities and others have become more volatile. The recurrence of price volatility became more frequent and more severe. This means greater risks and may indicate the degree of concern the investors have all over the world. The second fact is that there are no longer issues taken for granted or stable facts, things that people used to rely upon before the crisis. Here I can not even exclude the capitalist model itself, which was viewed by many as the best alternative.
Here, I would like to take this argument to get to a question: Does this cynicism apply to the role of gold as a safe haven during crisis time?
Before answering this question I would like to point out that any review of a subject aims mainly to discuss how far the subject was affected by the crisis, and this applies to gold.
Let us first review the average gold prices during the past ten years
During 10 years, the average gold price plunged once, in 2001, and the rate of the average price fall was 2.85%, compared to the average price in 2000. The average price in 2008 reached 874.2 U.S. dollars, which means that growth of the average gold price compared to 1999 is approximately 213.9% and 25.7% compared to the average price in 2007.
Despite the fact that we are dealing with average prices, this does not mean that growth rates necessarily represent the levels of profit, because this depends on the form of gold investment and trading seasons. The aim of showing prices and percentages is to reveal whether those prices and rates provide a margin of safety and an initial indication for the investor in order to compare them with other investment alternatives, and how valid is the inclusion of the yellow metal to the investment portfolio.
Forms of investment in gold
There are four main forms of gold investment.
First: the direct purchase of gold jewelry in the form of gold or gold coins, issued by the central banks or in the form of gold bars (various sizes).
Second: buying the gold in a commodity market, or trading in gold, and this form is similar in principle to trading in the stock market with a difference in some of the rules and conditions of sale, delivery and delivery costs.
Third: through participation in investment funds focused on investing in gold.
Fourth: to invest in gold production companies or gold trade listed in the financial markets.
Adopting one form or more of these types of investment depends on the investor's ability to deal with these forms. For the ordinary investor, who owns general and unspecialized information, and wants to add gold to his investment portfolio, perhaps the first and third forms are closer to his personality in terms of reducing market risk.
Gold in times of crisis
There is an old saying which runs: "with gold lies the value". This statement arises from a major cause, which is the imbalance between supply and demand. This imbalance creates inflation as the value of the currency goes down as much as the inflation rate. Resorting to gold is a protective or a preventive measure to reduce the inflationary impact on the investor.
When we review the history of economic crises since 1781, especially in the United States, we find that gold prices either were rising or remained stable during the period of crisis.
Is this crisis any different? Yes, it differs from all previous ones, but to what extent this difference affects the role of gold.
The performance of gold during 2009
The performance of gold prices in 2009 will be influenced by two sets of factors:
The first set includes the major players in the international gold market, and national central banks will top this group. If these banks feel they need the liquidity at certain price levels, they may resort to selling large quantities of gold that will pump liquidity into their economies.
I do not believe that major industrialized countries will resort to that measure in the light of current price levels, not to mention reasons related to every state, which we should not mention here.
Within this group we also find the gold mines and their role concerns the additional amount of gold, which is pumped to the market. It is likely that 2009 will witness the addition of (335,000) ounce and this quantity could only force a limited impact if the production is concentrated during a specific period of the year, but will contribute to fluctuations in price.
We add to that the increased volatility, which may exceed the daily rate of change in the ratio of gold during 2008 amounting to 1.4% It is the highest rate ever measured during the nine years since 1999.
In fact, the first set always represents factors affecting the gold market, even beyond 2009, while the second is the pumping of liquidity by the U.S. government to rescue financial and non-financial institutions. The continual pumping of liquidity would lead to two possibilities:
The first one reflects contraction gradually and leads to the emergence of inflation.
This possibility leads to higher prices for gold. The second possibility is that of the government withdrawing liquidity from the market in order to maintain the money supply within certain levels, and this procedure leads to the eventuality of lowering gold prices.
In terms of technical analysis, it is expected that gold prices would exceed $ 1000, but there is disagreement about what comes next. Some believe that it is possible that prices could reach 1500 dollars, perhaps with a little exaggeration, but I think it is possible to see the level of 1200 dollars.
The possibility of continuing the upward pattern of gold price behavior during 2009 does not mean at all a return to conventional thinking. It seems clear that the crisis has created a different situation that requires us to adopt and show a flexible approach, something that fits the new world which will not return to its previous condition.
Dr Wadah Al Taha - Senior Economic and Financial Analyst
