The recent volatility in gold prices has left not only investors and traders puzzled about what is going on with the precious metal.
"Nobody really understands gold prices and I don't pretend to understand them either," Federal Reserve chief Ben Bernanke told the Senate Banking Committee on Thursday in response to a question on why gold prices have been volatile.
As traders speculate whether battered gold prices can make a decisive push above the key $1,300 level or are headed for more pain, analysts say there's another key factor for the gold outlook that is being overlooked: strong demand for gold from Asia.
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Former U.S. Mint Director Edmund Moy says the recent volatility in gold prices has distracted U.S. investors from noticing the strong demand for physical gold, particularly from Asian investors.
"Lower gold prices have spurred even stronger demand by Asian investors. That has resulted in a huge transfer of physical gold from the U.S. to Asian economies, especially China," said Moy, who is currently the chief strategist at Morgan Gold, which sells gold coins as investments.
Gold has rebounded almost 9 percent from a near three-year low hit in late June on easing worries about an unwinding of U.S. monetary stimulus. But after a fall of more than 20 percent this year, sentiment remains weak and analysts are not convinced the metal is a good long-term buy.
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According to Moy, while electronic derivatives of gold such as exchange traded funds (ETFs), futures contracts are popular with Western investors, these proxies have not yet become a substitute for physical gold in Asia.
"If mediocre economic growth in the United States continues, expect the Fed to have great difficulty unwinding QE [quantitative easing] without inflation, which will cause U.S. investors to seek physical gold again but with far less supply available," said Moy.