Gold brewing bubbles or backed by fundamentals

The case thus far: Gold futures hitting the $1,800 level is of no surprise. First and foremost, the US credit rating downgrade to AA+ by Standard and Poor’s had somewhat eroded USTs as a safe haven, and gold have been increasingly demanded as a viable substitute asset to hedge against uncertainties. Secondly, renewed Eurozone fears stemming from France’s banking exposure to Greek debts and rumors of a credit rating downgrade also intensified risk aversion in the markets, driving up demand for safe havens. Lastly, Korea’s purchase of 25 metric tons of gold for diversification had signalled central bank’s continuing interest in the bullion as protection against declining paper currencies and economic uncertainties.

Key events to watch out for would be the Fed’s decision on QE3 (or anything similar to it), as well the ongoing developments on the Eurozone debt crisis. A resolution to the Eurozone debt crisis could stall the short-term gold rally, but the medium-term uptrend for gold prices remains structurally intact in our view. On the other hand, the any QE3 should prove supportive of inflation expectations, stymie the USD and in turn allow further upside in gold prices.

From OCBC Treasury Research