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Gold Shines as Alternative Currency: Crisis Fighting Drove Gold Investment Demand

The U.S. Comex gold futures have risen in five consecutive weeks by 9.79 percent from 17 August to 21 September, ending at a recent high of $1,787. During this run, gold price has outperformed many major markets including the S&P 500, the Euro Stoxx 50 and the CRB Commodities indices which have risen 3.16 percent, 4.37 percent and 1.81 percent respectively. The Dollar Index dropped 3.96 percent in the same period. In the past two days, the Comex gold futures, the S&P 500 and the Euro Stoxx 50 indices retreated 0.66 percent, 1.26 percent and 0.08 percent.

The stock and gold markets generally rallied owing to the stimulus actions of global central banks, the expectations of a European centralized banking supervisory body as well as the ECB announcement of bond-purchase programs with conditionality. Recently the IMF Managing Director warned the policy makers to deliver what they have promised to keep the crisis-fighting momentum going. The IMF now expected the global economic growth to be lower than the 3.5 percent and 3.9 percent for 2012 and 2013 forecasted in July. The September German IFO business climate was lower than expected at 101.4 and at a 30-month low. Spain has not asked for a full rescue for fear of giving up the “sovereignty” and Greece has been struggling to meet the bailout conditions. The U.S. consumer confidence in September rose to 70.3 and the July housing prices also rose 1.2 percent year-on-year. However, the fiscal cliff in the U.S. could drag down economic growth by as much as 2 percent according to the IMF.

Year-to-date gold prices have risen around 17 percent on an annualized basis, in line with the annual performance since end-2000. The Newmont CEO recently mentioned that gold price is largely driven by the investment demand and the limited supply growth. It generally takes 17 years from the exploration to the discovery of gold. With increasing money printing by central banks to monetize debt, the resultant currency weakness makes gold shine as an alternative currency. The central banks of Kazakhstan, Turkey and Ukraine added about 10 metric tons to their gold reserves in August. For 1H 2012, global central banks added over 254 tons of gold reserves. Bloomberg reported that gold-backed ETP holdings reached another record at 2,548.5 tons on 24 September.

People love to conjecture a gold bubble. Our CEO Ross Norman thinks not given the run rate of the U.S. monetary expansion and the bull run of gold can last another 5 to 7 years. The Deutsche Bank analysts calculated using a historical measure of gold against major benchmarks, gold price could range from $1,455 to $2,960.

Austin Kiddle
Sharps Pixley, London

26 Sep 2012 | Categories: Gold

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