Rollercoaster ride for gold seen ahead
GOLD has stormed higher over the past week or so to hit new highs as the US dollar came under severe pressure and inflation fears rose. But with the precious metal still above the $1,000 mark, gold bugs and bears alike are asking how much higher it can go.
Spot gold reached a record $1,061.20 last Thursday as weakness in the greenback increased the desirability of using the precious metal as a hedge against the dollar. Barclays Capital analysts have even suggested that gold could surge as high as $1,500 an ounce based on previous technical trading patterns.
“In our view, expectations for the dollar to weaken further coupled with fears of spiralling inflation are likely to continue to buoy positive sentiment; however, given that speculative interest is at record levels, a stronger dollar could spark a temporary price correction,” commodities analysts at the investment bank said.
They also noted the importance of retail investor demand for gold through exchange-traded products, which is driving prices higher.
Capital Economics’ chief international economist Julian Jessop gives three reasons which could drive the gold price even higher. Firstly, an increase in inflation fears, which he thinks have not yet played a big role in the rally so far.
However, while admitting that these fears could boost the gold price, he thinks that underlying inflation still has further to fall. Secondly, a loss of confidence in paper currencies and the dollar in particular. And thirdly, market psychology means that gold’s desirability will continue to attract investors to the yellow metal.
But while there is certainly a chance of another surge higher in the price of gold in the coming weeks, Jessop believes that any spike will be a speculative bubble rather than a sustainable increase in prices.
What’s more, he says: “Almost all the gold ever mined is still available as potential supply that can quickly come back onto the market – meaning that any spike in the price of gold is likely to be short-lived.”
And should the US dollar stage a partial recovery over the coming months, then this will also take the sheen off gold.