What Drives Gold Prices?

There are many factors contributes in Gold price movement. Apart of Demand/Supply fundamental factor, low interest rates in many developed countries (e.g. US, Japan, UK & ECB) which compels investors to own this precious metal which gives better risk – adjusted return, especially when two other important factors which are key to determining the direction of gold prices also favors.

One is Dollar index, which is plunging & the other is crude oil prices which is surging along other commodities.

On-going turmoil & uprising movements in MENA also makes investors jittery so they opt for safe haven. Another factor which pulls the demand is growing wealth in middle class population in many Asian countries especially in India & China.

What drives current Gold prices?

There could be countless factors, but I specially want to talk about two factors which I can quantify relatively easily.

1)      Gold prices have negative correlation with US dollar index (trade weighted dollar). As US Dollar index is declining, therefore gold is going in opposite direction                 

Correlation between Gold & US Dollar Index	-0.44
USD Dollar Index YTD** Performance	-5.30%
Gold YTD** Performance	5.20%
*3 year (2008-2010) correlation
** 1st Jan 2011 - 19 April 2011

Source: World Gold Council & Bloomberg

                                                       

Gold & US Dollar Index:                                                                                                                                                                                                                                                                                                   

                                                           

 2)      Gold prices have positive correlation with crude oil & other commodity Indices. As Crude oil prices along with commodities are increasing (upward pressure on inflation), therefore gold is surging too.

Correlation* between Gold & Brent Crude Oil	0.35
Brent Crude Oil YTD** Performance	28.80%
Gold YTD** Performance	5.20%

*3 year (2008-2010) correlation
** 1st Jan 2011 - 19 April 2011

Source: World Gold Council & Bloomberg

MENA - Economic Outlook

Despite all the whispering & uprising movements, which challenges Middle East & North Africa (MENA) region stability by large, the truth is its growing. Although, growth varies widely across the MENA region.

There are mainly two blocks within MENA region, one is oil importing countries & the other is oil exporting countries.

GDP Growth:

MENA has 5.0% share in World's total GDP, based on purchasing power parity (PPP).

In next couple of years, it is expected that MENA region will grow in tandem with World growth rate; better than advanced economies but significantly lower than emerging & developing economies.

GDP in the MENA region is projected to grow at 4.1% in 2011, edging up to about 4.2% in 2012. In the group of oil exporters, growth is expected to pick up to 4.9% in 2011 while in the group of oil importers, GDP will slowdown to 1.9% in 2011. In 2012, Oil importers economy will strongly bounce back to 4.5%, on the other hand oil exporters group’s economic growth will take a small dip to 4.1%.

                                                                                                                                                                                              

Real GDP Growth
(Annual percent change)	2010	2011F	2012F
World	5.0	4.4	4.5
Advanced Economies	3.0	2.4	2.6
Emerging & Developing Economies	7.2	7.3	6.5
Middle East & North Africa	3.8	4.1	4.2
Oil Exporters	3.5	4.9	4.1
Iran	1.0	0.0	3.0
Saudi Arabia	3.7	7.5	3.0
Algeria	3.3	3.6	3.2
United Arab Emirates	3.2	3.3	3.8
Qatar	16.3	20.0	7.1
Kuwait	2.0	5.3	5.1
Iraq	0.8	9.6	12.6
Oil Importers	4.5	1.9	4.5
Egypt	5.1	1.0	4.0
Morocco	3.2	3.9	4.6
Syrian	3.2	3.0	5.1
Tunisia	3.7	1.3	5.6
Lebanon	7.5	2.5	5.0
Jordan	3.1	3.3	3.9

Only major Oil exporting & importing countries mentioned

Source: IMF, April 2011

Amongst resource rich region; GCC, it is expected that Qatar’s economy will shine both in near term (2011-2012) & medium term (2011-2016) while UAE will lag in the GCC region.

Source: IMF, April 2011

                   

Dubai World Restructuring Positive for Dubai

Since, state-owned Dubai World signed a final  accord with creditors to restructure its debt, about USD25 billion on 23^rd March 2011, investors & market participants perceive that it would help in restoring the confidence in Dubai's ability to repay the debt.

·         Dubai dollar bond & extra yield shrinks
The yield on Dubai's debt maturing in November 2014 fell to a record low of 5.24 percent & the extra yield investors demand to own Dubai's 6.396 percent dollar bond dropped to 251 basis points, lowest ever.

HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index shows that the extra yield investors demand to hold the region's sukuk over the London interbank  offered  rate narrowed by 68bps to 322bps, since Dubai World signed a final debt deal with its creditors

·         Increase fund flows to Dubai's high yield bonds
According to EPFR Global, Dubai benefited 64% jump in flows to higher-yielding bonds in 1Q2011

EM equity fund flows turn green

After nine consecutive weeks of redemptions from aggregate EM equity funds, this week (27^th March 2011) has seen a healthy USD2.6bn inflow (0.4% of AUM) into EM funds, the most since the week that ended 5^th January 2011, EPFR.

Last week there was a redemption of USD 2.6bn in EM equity funds.

By region:

All region-dedicated funds saw inflows -- except Latin America, reporting an outflow of USD81mn. Global emerging market and Asia-focused funds were the big winner, attracting USD1.5mn and USD411mn respectively, this week

CEEMEA saw inflows as a percentage of assets (1.5%), followed by Asia (0.2%); Latin America remained the loser (-0.1%).

By Type of fund:

EM Balanced funds were the main beneficiary with a reported inflow of USD1.6 bn.

BRIC  funds remain out of favor with reported redemptions of USD73mn.

Saudi budget: break even oil price will increase to USD 88/bbl in 2011, 29% Y-o-Y increase

MARCH 31, 2011, 8:01 PM ET

Saudi Arabia, due to higher government spending this year, will need its oil to sell for $88 a barrel in 2011 for its government to break even–up from $68 last year, according to Institution of International Finance

Only a decade ago, Saudi Arabia was able to balance its budget with oil prices averaging $20-$25 a barrel.

The kingdom, in response to the unrest spreading throughout the Middle East and North Africa, is boosting government spending to provide new social benefits for its people. The support for housing units, unemployment benefits and wage hikes for public workers (among a long list of measures) will contribute to a 31% increase in government spending in 2011 from a year earlier.

Saudi Arabia, the world’s largest oil producer, gets more than four-fifths of its government revenue from the petroleum sector. Under an average price for Brent oil of $110 per barrel, equal to about $108 a barrel for Saudi crude, the Saudi government would still maintain a surplus of 6.7% in 2011.

Saudi output accounts for about 10% of global oil supply. With most of the world’s spare production capacity, it influences the price of oil more than any other producer — and has taken on greater importance amid unrest in Libya, Egypt and other oil-producing countries.