Gold prices to keep rallying as investors remain risk averse

Gaining 11 percent since the beginning of the year, gold set a new record in international markets last week when the prices skyrocketed to $1,252 per ounce. Even though the prices fell slightly during the following two days, experts still believe that prices will continue to rise, though fluctuations are likely to happen in the short term.

“The recent fall from the record high level of $1,252 is just a correction,” Alper Kalyoncu, senior dealer at Garanti Bankası, said in an interview with Sunday’s Zaman, considering it a temporary phase for profit realization. In fact, it is not the first time that gold prices have recently approached historic highs. It happened two times last month, hitting $1,248 and $1,249.50 on May 12 and 14, respectively, but decreased to around $1,200 again. “Investors saw the pullback as the opportunity to buy and prices started rising again,” Kalyoncu explained.

According to him, gold prices will maintain the upward trend in the mid and long term due to high levels of liquidity in markets, along with a rising tendency for risk aversion. “Prices will reach $1,250 again shortly and will hover between $1,250 and $1,300 within the coming two months,” Kalyoncu predicts. There may not be significant rises in prices until the fall because summer months tend to see a rather stagnant trend in gold markets, he said, however reaffirming that “prices will further surge to $1,350 through the end of the year.”

Cihan Kamer, CEO of Atasay, one of the leading jewelry producers in Turkey, also expects gold prices to continue to gradually increase. “Prices might drop below $1,252 per ounce, but we still expect them to reach $1,265 at first and further climb to $1,300 later on,” Kamer told Sunday’s Zaman. According to him rises in gold stem from the belief that gold is a “safe haven” and large funds continue to buy gold since they find it safest among other financial investment instruments.

Sertaç Ekeke, an analyst at Hedefonline, a securities and commodities consultant, also shares the idea that despite fluctuations in the short term, prices will eventually rise in the mid and long term. “Indeed, we expect prices to ease shortly. But then, they might hit a new record high in summer, reaching $1,270. Yet, by September it will further climb to $1,300,” he predicted. But are prices increasing due to a rise in demand as the wedding season approaches? Ekeke does not think so but believes gold is gaining more in value because more people are investing in it now.

Rises due to risk aversion or speculation?

However, experts are split over the reasons for this long-term rally. While some attribute it to the precious metal’s “safe haven” appeal amidst economic turbulence, others point to speculation.

According to Erkan Kurtulmuş, president of the İstanbul Chamber of Commerce Jewelry Committee and owner of İnci Jewelry, gold is gaining value mainly on speculation. “It is a few funds that are deliberately driving the prices to these highs. They purchased gold at high prices, but couldn’t manage to find any buyer then. And they still can’t find any, and keep raising the prices continuously,” he said.

The cost of producing an ounce of gold is $400, less than one-third of current sale prices, Kurtulmuş noted, pointing to the incredible profits the dealers are making. “Gold should have been sold at a price of $450 to $500 at most,” he said, adding that current prices are not the equilibrium prices and are failing to attract buyers. For this reason, Kurtulmuş believes that prices cannot remain at these highs for long.

“But they can still break new high records on speculation, because only three to five funds are dominating the market,” Kurtulmuş stated, stressing the need of auditing investment funds.

Mehmet Ali Yıldırımtürk, an expert on gold and currency markets, also shares the same opinion. Rises in gold prices do not stem from physical demand but from the speculative activities of investment funds, he asserted. “Prices seem to be easing now, but they may start rising again with any negative news from Europe, as investment funds will be using people’s worries for their own benefit.”

However, a drop in interest rates by the US Federal Reserve or the European Central Bank, both of which are expected before the end of the year, might help gold prices decrease, he forecast.