Gold Bugs, Rejoice! The Yellow Metal Has Done It Again

March 2, 2011, 1:06 PM GMT
WALL STREET JOURNAL

Commentary: By Francesca Freeman

After taking a breather throughout January and making up lost ground in February, gold started March with a spring in its step, hitting a fresh record high of $1,439.15/oz a troy ounce Wednesday at 1600 GMT. And with the market’s attention firmly locked on escalating tensions in Middle East and North Africa, the question on everyone’s lips is: “How much higher can gold go?”

A target price of $1,450/oz seems a reasonable place to start, though many industry players see gold easily surpassing $1,500/oz—or even $1,600/oz—this year. While political unrest in Libya threatens to spill into other MENA nations such a Bahrain, Oman and—potentially—oil-rich Saudi Arabia, gold should be well bid as both a hedge against political insecurity and a store of value amidst rising inflation on the back of high oil prices.

But what then? If problems in the Middle East ease—an unlikely scenario, but a scenario, at least—could the bearish sentiment that haunted the gold market at the beginning of the year return?

Some say no. While the market is blinkered toward the storm clouds on the geopolitical horizon, sovereign debt problems—both in the euro zone and further afield—could come back to bite in coming months.

Jacob Rothschild, the well-heeled chairman of London-listed investment trust RIT Capital Partners, has stood by Old Yeller of late, upping RIT’s investment in “real assets” like gold in a bid to protect against economic instability.

“These areas provide some protection from inflation and have performed well for our shareholders,” Mr. Rothschild said in RIT’s most recent report.

RIT also backed a £12.5 million joint equity investment in online gold dealer, BullionVault, by the World Gold Council and growth capital fund, Augmentum Capital, in June, a sign of confidence in the gold market.

As if to cement Mr. Rothschild’s economic concerns, ratings service Standard & Poor’s said Wednesday that it plans to keep a close watch on debt-laden Portugal and Greece for possible credit downgrades, due to a lack of clarity over the “key features” of Europe’s bailout fund, the European Financial Stability Facility.

But despite the challenges of heavy debt, the global economy has been showing signs of growth in recent months, with a string of positive economic data buoying sentiment for so-called “risky” assets such a equities and base metals before problems came to a head in the Middle East.

Whichever way the needle eventually falls for gold this year, one thing looks certain: while tensions head towards fever-pitch in Libya, the only way for gold—at least for now—is up.

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