Market watchers are calling for gold prices to hit $1,500 an ounce in the next three months, as the precious metal continues chugging ahead on a two-and-a-half-year run that has coincided with the beginning of the financial crisis.
Certainly, there are some who think that the gradual recovery of the global economy could mean this is one bull that is beginning to run out of breath.
But there's plenty of evidence that suggests otherwise. With the current upheaval in the Middle East, inflation worries in Asia, a seemingly endless sovereign debt crisis in Europe, and a weak US dollar, many see gold as a continuing safe bet.
“Apart from equities and commodities, there do not seem to be many other assets investors are keen to buy, other than gold,” Manoj Ladwa, a senior trader at ETX Capital told CNBC.com.
Ladwa said that although the price of gold hasn’t increased by that much in the last three months, he still expects it to creep higher in the second quarter.
Like Dominic Schnider, head of Commodity Research at UBS Wealth Management, Ladwa thinks that gold would hit an upside target for the year of $1,500.
That view is also supported by Anne-Laure Tremblay, precious metals analyst at BNP Paribas. “We see gold averaging $1,500/oz for 2011 and peaking at an average of $1,600/oz. Low interest rates combined with higher inflation expectations mean that expected real rates of return are negative, which is supportive for gold prices, as it is for other commodities. Inflationary pressures, notably in China, boost demand for gold bars and jewelry as a hedge,” she told CNBC.com.
Higher, Yes, but Why?
A general lack of lack of political and market certainty in the Middle East, Europe and elsewhere, combined with easy central bank monetary policies, have continued to buoy the price of gold.
Those were certainly the main reasons cited by Ladwa, who also suggested that the specter of a third round of quantitative easing in the US is helping to push the price up.
“If we see increased quantitative easing in the US money flow will naturally go into gold. I don’t expect an interest rate rise in the US or UK in the second quarter, despite rising inflation. And as long as inflation rises, gold will continue to attract investors,” he said.
Tremblay added that although the European Central Bank was likely to be the first to lift its interest rates, the move was unlikely to weigh too strongly on gold prices, as the metal is more sensitive to changes in US financial conditions.
“As such, strong downward pressure on gold as a result of central bank action will come when the Fed hikes rates, which we expect to be some time in the first half of 2012,” she added.
She also stressed that while uncertainty about the global economic recovery had subsided with stronger-than-expected leading indicators in the first quarter, safe-haven demand for gold remains. It was simply that concerns had shifted on the back of geopolitical events, the level of indebtedness of developed economies plus uncertainty over the broader economic effect of the earthquake, tsunami and nuclear crisis in Japan.
Such events meant that talk of “bubble-like conditions” in gold were, at the very least, premature, according to Ladwa.
“Although it has had a sharp rise in recent years, we are not seeing the increased volatility or the euphoria that we normally witness in asset-price bubbles. I also can’t find much in the way of correlation between gold and any other commodities. The dynamics for gold, certainly in the current environment, seem to be quite unique," he said.
Why Gold as a Hedge May Be Here to Stay
Gold as an Asset Class
Ladwa's point was taken further by Michael Haynes, chief executive of the American Precious Metals Exchange, who told CNBC.com that gold as a hedge against geopolitical and economic uncertainty may be here to stay.
“Today what investors are coming to realize is that stocks, bonds and cash alone don’t work on all occasions,” he said.
“We have more news out of [the] Middle East and have China consuming goods at an enormous rate, as well as problems with the Euro debt crisis. Stocks, bonds and shares alone don’t do it in these circumstances. People are looking for an asset class to cover them for these eventualities so they are beginning to invest between 8 and 12 percent of their portfolio in gold.
“As an investor, I don’t necessarily want gold to perform that well. I want the other 88 percent of my portfolio to perform well. But you can’t live in a world in which every asset class in your portfolio performs," he said. "It’s impossible."
Even technological changes are contributing to gold's new and improved status. Instant communication across the globe and the ability to move money in near-real time have meant market reactions to global events have been quicker and market shocks almost instantaneous, according to Haynes.
That being the case, investors are learning to be wiser about what they invest in. The physical weight of gold—almost literally—means that investors know they always have something valuable to trade at all times.
“The world is a much smaller place, and we don’t invest for today; we invest for a time horizon. So what you have to do is look ahead to the next three to five years and try to have an investment strategy that takes account of the risks there could be over that period in your portfolio," he said.
“Gold is the only currency that can't be manipulated politically in the way that currencies, say, can and often are. And all currencies in the end are valued against it. It’s been like that for the last 4,000 years.”