Commentary - Gold

Gold surged to an all-time high of $1,296.50 per troy ounce this week and has gained 1.3% on the week. The FOMC meeting on Tuesday served as a catalyst for higher gold prices as the precious metal came under heavy demand from investors seeking protection from a deteriorating US dollar. The Fed’s acknowledgment that inflation is ‘somewhat below’ levels deemed consistent with their mandate was taken as a hint that further Quantitative Easing (QE) was on the agenda. These comments saw the US dollar plunge this week. As confidence in paper based fiat currency begins to fade, demand for gold will increase as investors seek an asset that will retain its value during times of uncertainty. This demand will not only come from US investors fearing a drop in the dollar, but also Japanese investors worried about further currency intervention from the Bank of Japan, as well as UK investors who are seeing sterling decline amidst buoyant inflationary conditions. The additional uncertainty surrounding the US mid-term elections is likely to support gold as well in the short-term, while physical demand for the metal is traditionally high this time of year due to festive activities in India. It is difficult to see what may break gold’s remarkable momentum in the near term. The possibility of a prolonged equity market rally and greater clarity in the global economic recovery could see investors lock in gains in gold to seek higher yielding assets. In my view, however, this seems unlikely to happen in the current environment. Furthermore, gold is currently still well below the nominal high of $873 an ounce reached in 1980 - in inflation-adjusted terms this would equate to $2,312.94 today.