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By Andrea Hotter
Of DOW JONES NEWSWIRES
LONDON (Dow Jones)--The return of risk appetite to the financial markets is lifting gold, copper and oil once more Tuesday as investor fears about events in Dubai recede.
A series of reassurances and a liquidity injection from the United Arab Emirates' central bank has steeled investor nerves, ending the U.S. dollar's temporary safe-haven status and propelling gold to a new record high of $1,199.25 a troy ounce in European spot trade. Comex February gold futures reached $1,200.50/oz. Both markets have eased a few dollars since, but further gains are widely expected.
Copper, an industrial metal used in housing and construction, is now back above $7,000 a metric ton at a near-2009 high, while oil is higher, near $78 a barrel.
"The resilience in which the market took the [Dubai] news suggests most still see the cup half-full," said Mark Pervan of ANZ Bank.
Yet if the impact of Dubai's request for a debt standstill has been short-lived, the jury is out as to whether the sovereign risk problem has gone away.
According to the International Monetary Fund, the total debt of the Dubai government and its public sector-linked entities is $47.6 billion--around 90% of Dubai's gross domestic product but just 19% of the U.A.E.'s GDP as a whole and around only 4% of the $1,100 billion-plus that banks globally have written off so far due to the financial crisis.
Even if Dubai does end up being what one trader described as "a storm in a sand cup," the possibility of a default in other countries such as Greece and Ireland is being widely debated.
"Considering the magnitude of the reaction in the markets, it is clear how quickly the bulls are ready to sprint for the exits at the least sign of trouble and [it] makes one wonder about the durability and conviction of the recovery cycle in asset prices," said John Hardy, foreign exchange strategist at Saxo Bank.
For now, however, investors are shrugging off the potential contagion, saying they can ill afford to stand in front of the weight of money entering the sector.
Barclays Capital estimated recently that year-to-date inflows into commodities by mid-November approached $55 billion, displacing the previous record of $51 billion in 2006.
"The most popular story is the one a bank can still sell," a London-based hedge fund manager said. "There are so many discredited stories that banks have sold over the last few years that they are now making a full effort to sell gold and commodities [as an investment], because the story is not discredited--yet," he said.
Central banks are seeking to reflate their economies by maintaining interest rates at such low levels that investors are enticed to buy higher-yielding assets like commodities. Governments meanwhile don't appear to be in any hurry to end stimulus measures--Japan earlier Tuesday announced a fresh injection of liquidity "to encourage a further decline in longer-term interest rates."
The liquidity that this and other similar measures generate means commodity prices are set to run higher still, brokers say, even if there is a growing concern that an asset class bubble is being created.
-By Andrea Hotter, Dow Jones Newswires; +44 (0)20 7842 9413; andrea.hotter@dowjones.com
