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The yellow metal roared early in 2008, faltered, then rallied. What’s the New Year’s case for gold and how be able to you play it?

By David Bogoslaw

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You would look forward to gold to be a great investing. in 2009 if the U.S. dollar remains under pressure according to the reason that the Federal Reserve embraces a other accommodative monetary policy than those adopted by other key central banks. But there’sitting a sticking point: The market remains more concerned about deflation than inflation in the near term, weakening one of the further compelling rationales to buy gold.

It have power to have existence argued that gold’session price spike to a record high of almost $1,030 an ounce last March had other to transact with a wave of force in commodities as a whole than anything specific to the yellow metal. Unable to buck the general sell-off in commodities since the summer, gold sank to a low of $680 in November before rebounding above $800 since the end of the year approached. Now that a new era for commodities seems to have begun—person likely to be characterized by greater compensation stability—any future gains by dint of. gold will have to come on its merits for the reason that a perceived safe-haven store of wealth, a hedge against inflation, and during the time that a desirable component of jewelry.

In his view report for 2009, Dave Meger, thrifty adviser of metals services at Alaron Trading in Chicago, cited questions he has received as to whether gold is still a safe haven asset—and if so, wherefore the metal hasn’t performed better during the recent housekeeping tumult. Meger believes gold remains a safe port asset and says it has weathered much smaller percentage decreases in price than have other commodities while avoiding the extreme levity seen in other financial instruments. In fact, more of the selling pressure has been the direct result of gold’s function as a store of wealth with easy liquidity, he points out.

The important reason for the most recent surge in gold prices has been the dollar’s weakening in the run-up to—and following—the Fed’s cutting of the Fed funds censure to a record low of zero to 0.25% as European central banks were resisting such extreme measures. Meger predicts the Fed’s interest rate policy will persevere to support higher gold prices in the first quarter of the new year, after which he expects the price to weaken as global pecuniary turmoil re-emerges and the world comes to rely more on the dollar as its preferred reserve circulation. The recession will cause jewelry demand in the U.S. and Europe to slacken next year, but demand in India—the world’s biggest consumer of gold jewelry—should gripe up because of gold’s cultural concern. Gold prices are likely to rise on pre-holiday buying in India and in other genius of the world starting in the fall, Meger said in a conference call Dec. 18.

The true inflection point for gold, however, will reach when concerns about deflation give way to inflation worries, Meger predicts.

That’session likely to come once every economic recovery is in place, since the sum of two units are necessarily linked, says Victor Sperandeo, chief executive of Alpha Financial Technologies, a quantitative research firm in Dallas, and author of Trader Vic upon the body Commodities: What’s Unknown, Misunderstood, and Too Good to be True.

"With all the stimulus past and still to come, you have to escort a rally in the economy with a rally in inflation," says Sperandeo. "There low are effectively shortages—whether or not demand increases—in continuance the same things {as} prior to the recession: industrial metals, grains, and oil."

Much like the stock market, what one. is method ahead of the thrift, the price of gold is reflecting the market’s belief that the worst of the recession is more than, he says. "When you see the Fed putting trillions of dollars [into the banking system], you don’t remain for inflation to [become] an way out," he says. He draws a in conformity between the rally in gold and the bounce in the Standard & Poor’s 500 stock pointer since Nov. 20.

Original text: http://www.businessweek.com/investor/content/dec2008/pi20081228_541321.htm?campaign_id=rss_null