Gold prices increase 50pc this year
Manama, August 26, 2011
Since the start of this year the price of gold is up by more than 50 per cent, and since the start of the financial crisis, it has risen by 150 per cent, and there are signs the rise could continue, according to a report by Forex.com.
While the majority of media focus has been on the recent price rises, gold has been in its current uptrend since the early 2000’s, when it was trading at $200 per ounce.
'Gold, like other commodities, tends to exhibit long trend cycles, but even if it has been in a current uptrend for the best part of 11 years, history tells us that trends in gold can persist for longer than this,' said Forex.com research director Kathleen Brooks.
'The West has been on a debt binge for 10 years. Paying down debt means people and governments won't be spending as much and so it follows that growth will fall.
'A weak growth environment is usually bad for stocks and can cause interest rates to fall. When yields are low - both bond and equity dividend yields - investors are attracted to gold,' Brooks added.
'The precious metal doesn't yield anything, but holds its value during economic turmoil or weak growth. That is why gold has been moving inversely with the size of the Federal Reserve's balance sheet,' she said.
'As it has embarked on a double dose of quantitative easing, the Fed has been accused of debasing its currency,' she added.
'When the world's reserve currency is falling at this type of annual pace, investors look elsewhere for value, and what better than the world's most famous store of value - gold. At the same time, as the dollar has fallen 10 per cent, gold is up by a whopping 50 per cent. Going forward, if there is further quantitative easing, we may be in unchartered territory for gold and the dollar,' she said.
'It's easy to think that gold's performance this year is all down to the Federal Reserve or worries about the future of the euro, but it is also down to traditional price drivers - supply and demand fundamentals,' she added.
'Gold takes a long time to extract from the earth, it is expensive and there is not that much of it, so supply is tight. On the other hand demand is growing. Central banks' gold purchases were up 168 per cent in 2010 relative to 2009 and this equates to 203.5 metric tonnes, equivalent to 15 per cent of total production. Added to this, retail demand for gold is also increasing,' she said.
'Gold has been called a bubble for years. However, so far it hasn't popped in any meaningful way. This doesn't mean that it is going up in a straight line,' she said.
'There can be daily fluctuations,' Brooks added. “Fundamental factors in the near-term that could hurt gold's rise will depend on the Federal Reserve. If there is a further round of quantitative easing in the US, then investors may react by diversifying out of the dollar, which may benefit gold.” – TradeArabia News Service