Gold has been revered for its beauty, rarity, indestructibility and value as a universal currency for millennia, and Wednesday’s move by the Federal Reserve towards qualitative easing spurred an additional spike in interest in the yellow metal.
Gold has long been seen as a haven against inflation and the Fed’s announcement earlier this week that it is to inject more than $1 trillion into the US economy was well-received by markets worldwide but also fuelled fears of inflation down the road, hitting the value of the dollar and also prompting a surge in gold prices. Greenback weakness and inflation are two of gold’s friends, when it comes to pricing the commodity.
“[Gold] provides investors with an excellent hedge,” Charles Stanley wrote in a recent note, “against the Fed’s decision being interpreted either positively (the scheme will be successful but that the ultimate consequence will be a burst of potentially aggressive inflationary pressure) or negatively (the scheme needed to be aggressive because it had to offset potentially significant structural deflationary forces).”
The metal’s reputation as an alternative asset helped the price of gold for immediate delivery peak at $967 an ounce early this morning--just $66 short of its record peak in March 2008 of $1,033 and considerably higher than its low last year of $700.
Barclays Capital today upped its assumption of the gold price for 2009 to $940 per ounce, on the back of its outlook for the dollar, noting that the Fed’s latest news sent the dollar into freefall: an environment in which “gold will shine,” the report said.
And BarCap analysts aren’t alone in their optimism. Traders at Marex Financial said in a note published today: “It is not a question of if, but when, the yellow metal will retest $1,000.” Earlier this year, Citigroup Foreign Exchange told investors it sees gold ultimately reaching levels in excess of $2,000.
With gold so hot at the moment—SPDR Gold Trust, the world's largest gold-backed ETF, yesterday reported that having added 323 tonnes of gold so far this year its reserves have hit an all-time high of 1,103 tonnes—the question is should investors move into a hot sector when history suggests this is not a particularly successful strategy?
Richard Bernstein, chief investment strategist at Merrill Lynch, wrote in a recent note that gold’s popularity of late appears to have quietly turned some fund managers into multi-asset hedge fund managers, while investors’ quick move toward the commodity has raised the question of whether gold has become a momentum investment rather than a fundamental one.
Believing that gold’s performance has indeed switched it to a momentum play, Berstein pointed out that: “Successful momentum investors outperform not because they identify good investments, but because they know when to sell hot investments. In other words, successful momentum investors are contrarian sellers. They sell assets at their peak of popularity.”
Near-term risks to investing in the metal seem plentiful, Berstein said, but he added that the long-term diversification benefits of gold seem likely to hold.
Gold has traditionally been viewed as a long-term investment: something to hold on to rather than to trade, but with investors having to navigate uncharted territory over the past year, it seems traditional investing methods are in a state of flux. In any regard, analysts appear to agree that gold prices are back on the rise and that it is imperative that investors hold a diversified portfolio, containing at least some gold whether in the form of bullion itself or via a gold-back ETF.
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