A hole in the ground surrounded by liars

Mark Twain's definition of a gold mine. And it applied for the role of UBS on gold. UBS has again lowered its 2009 forecast for gold, this time from US$825 per ounce to US$700, while other investors rate gold as a buy in intermediate term.

The revised UBS commodity price outlook reflects an extended recessionary scenario with base metal prices in both 2009/2010 that are mostly below the marginal industry costs and current spot prices.

UBS believes gold will remain under pressure in 2009 from a combination of slowing demand for jewelry and disinvestment as inflation slows.

But many money managers hold the exactly opposite views and they believed there could be a price manipulation. I believe the purpose of this claim made by UBS is definitely of personal interest rate. Remember Goldman projected the oil will remain at $150 by the end of this year? Currently global monetary stimulus have addressed the economic downturn. So the interest rates around the world will continue to go on a downward path on the short end of the curve. And we've already seen this in the short term — the balance sheets of the governments are expanding at a historically unprecedented rate. So the supply figures will be shooting up.

From my perspective, this means that the value of currencies, whether in the US, Europe, or elsewhere, will likely decline relative to the value of gold. In intermediate-term prospect, gold is a good hedge against this extreme level of monetary reflation we're likely to see.

Gold also has the advantage of not being as linked to the physical cyclical demand environment that industrial metals face. We thus think gold is likely to appreciate over this intermediate period — for the next year or so — against most currencies.