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Risky Business: Gold Investment in Short Term

Venus Fan 18.03.2009

The spring is in the air but the investors are still waiting for the green shoots to sprout. The global economic outlook remains weak despite of collective efforts in stimulus policies by the governments around the world. Meanwhile, the Fed’s quantitative easing measures along with rising budget deficit in the U.S. induce the skepticism in investors and consequentially, raise the inflation expectation in the market. In the backdrop of the weak US dollar and rising inflation expectation, investors turn to gold for the hedge and push gold price to the record high. The precious metal funds also experience significant fund inflows. The late commodity research released by Goldman Sachs and Morgan Stanley were bullish and predicted the gold price would reach 1,000 dollar an ounce by the end of this year. There are ample researches on the benefits of gold investment. Yet, little has been said about the risk of gold investment in short term. We intend to explore this with its given demand and price volatility.

Demand Story:
A Hedge Against Dollar and Inflation Prop Up Price of Gold in the LONG Run

The demand for gold has shifted from jewelry sales to investment over the past year by a huge margin. According to the World Gold Council, the demand for jewelry sales has slowed down while investment demand picked up exponentially last year. The statistics also attest to the enthusiasm toward gold investment. The inflows to gold futures and exchange traded products (ETPs) in the month of January and February of 2009 have outstripped that of the entire year of 2008. There are two main forces that drive the demand for gold as investment.

First and for the most, inflation hedge takes central stage.

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Venus Fan  

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