Climbing the gold peak

With gold prices hitting a new all time high above $1600/oz on the back of 12 days of rises, Business RT spoke with Investcafe analyst Pavel Yemelyantsev about the outlook, drivers and factors at play.

RT: How much higher is gold likely to go?PY :“Gold prices have grown dramatically since the early 2000s, from $260 per ounce to $1570. Furthermore, they have been growing steadily, without any major corrections. There was only one exception, a 20% correction in 2008, but this drop has long been compensated for and prices have grown by more than 100% from the lowest point.It is conventional wisdom that people buy gold as a safeguard in case of global economic problems that depreciate all other assets and increase inflation. But I think the role of gold is greatly overestimated, as there are no fundamental factors that would put it in high demand.For example, silver is used not only in jewelry or for investment purposes; it is very much used for industrial needs, which creates constant physical demand for it. Still, what we saw on the silver market in late April and early May was the burst of a real bubble blow up purely by speculators. Silver was so overvalued that prices dropped by about 30%.”

RT: What are the key factors driving gold?PY:“I believe what we see on the gold market is the same kind of bubble, blown up by speculations in a situation where some European countries are facing debt problems. If those countries manage to avoid a default, gold prices will collapse and fall to at least $1300 per ounce. On the other hand, if some European countries default on their debts, it is anybody’s guess what the consequences may be for all sorts of assets. For instance, the shares of many companies (including financial firms) may drop drastically, which means the market will be full of extremely interesting assets at very attractive prices, which, in turn, will cause market players to sell their gold and buy up shares while they are cheap.”RT: What alternatives to gold are there for those concerned about global volatility? PY:“Gold as a reliable insurance asset can be replaced by top-rated bonds issued by major international companies or countries. There is also certain demand for default swaps, which are essentially insurance policies that, in exchange for a relatively small sum, entitle the holder to compensation in case the issuer declares default.”RT: What effect will the end of QE2 have on gold prices?What effect would the start of a QE3 have on gold prices?PY:“New quantitative easing initiative will most likely exert certain pressure on gold rates. This is because QE3 is going to bring more money to stock exchanges and make stock rates grow. Thus, the demand for those assets will grow, which may cause some investors to get out of gold.”