Sunday, 20 November 2011

Gold has been on a bull run for more than decade

The price of gold has been rising for the last 11 years.  With the current interest rate environment, the continued volatility in the financial market, the European debt crisis, a weaker U.S. dollar and a fear that the world is slipping back into recession, experts say gold prices will remain strong.  Over the past six months, the spot price of the precious metal is up about 30 per cent.  Gold is a precious metal that cannot be destroyed or created and until before the Great Depression in the 1930s it was considered the world currency. 

On September 6th futures reached a record $1,923.70 an ounce.  Economists predicts gold could shoot past $2,500 in 2012.  Here is what is affecting the price of the precious metal.

Interest rates
Gold is traditionally seen as the alternative currency, low interest rates increase the fear of inflation and that pushes investors into gold. If interest rates remain low, the incentive for investors to put their money in fixed income products also remains weak.

Market volatility
Gold is viewed as a safe haven investment, because you can’t create it or destroy it. The theory is gold holds its value better than paper currency. When investors fear equities will loose their value and dividends will be cut, gold is a comfortable place to park your money on the sideline as you wait for the markets to stabilize.

European debt crisis
If countries are unable to pay their debts they are at risk of defaulting, essentially going bankrupt. This mean any other country that holds these countries bonds will be left with debt promises that will not be paid back. For this reason stronger countries are hesitant to lend to the debt-laden countries and are more likely to invest in gold.

Weaker U.S. dollar
The U.S government’s  bond-buying or quantitative easing programs called QE1 and QE2 have chipped away at the value of the U.S dollar. The more money the federal government prints to buy up treasuries, the lower it sends the value of the dollar.  Since gold is priced in U.S dollars, this sends the price of the precious metal higher.

Fear the world is slipping back into recession
Much like market volatility investors hate uncertainty. The threat of second global recession less than three years creates a flight to safe haven currency like gold. The indication is because the world is in greater debt than 2008 and countries have exhausted their options for getting the economy on track it could mean this recession is much deeper and longer.

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