Recently, the US Congress allowed the International Monetary Fund (IMF) to sell a portion of its gold reserves in order to raise funds for developing countries currently facing economic distress. Despite this rise in gold supply, the buildup of froth in global commodity markets continues with gold prices again touching their historic high of $1000/ounce. Similarly, other hard commodity prices, especially oil, are experiencing consistent though relatively gradual increase. Some corners have indicated this rise in gold and oil prices is a result of sheer speculation. Although we tend to concur, but it should be remembered that there are always fundamental reasons which shape investors’ expectations and hence determine the speculative trend. So, the question arises as to what explains the recent build up of froth in international commodity markets, including Gold?
We think that the answer is three fold in nature and is a combined result of:
· sharp increase in monetary aggregates in developing economies and the subsequent weakening of the US$
· reserve restructuring and easing of restriction on local gold trade by China
· seasonality and increased demand during the festival season in South Asia
Because of these three factors we think that the upward trend in gold can persist for a while and perhaps over the medium term as well.
