Online Gold Trading has hit record levels this year. Gold, in terms of value, has risen 19% this year and hit a high of $ 1072 / ounce on October 14th. This comes as no surprise as the US Dollar Index which measures the currency against those of its six major trading partners, fell to a 14 month low 1 day after Gold hit its 2009 record high.
What are the underlying factors for the meteoric rise of Gold?
– As mentioned in the introduction of this article, one of the main reasons for the advance of Gold is the rapid deterioration of the US Dollar. This deterioration in the reserve currency of the world has mainly been fueled by the Federal Reserve which over the past two years has embarked on an unprecedented Quantitative Easing program. The Fed together with other Central Banks across the globe have collectively pumped into their economies approximately 11.7 trillion dollars in an effort to combat the credit crisis. The vast sums of money that the Fed is printing while keeping interest rates close to zero has seen investors dump the greenback and diversify into other asset classes. One of the major beneficiaries, of course, has been Gold, as many investors across the globe perceive the precious metal as an alternative currency and a hedge against currency devaluation.
– With Central Banks across the globe currently holding interest rates at record low levels and still dumping vast sums of money into their economies, inflationary expectations right now are at very low levels but investors are fully aware that once the global economy recovers then Central Banks will aggressively hike interest rates in an attempt to guarantee future inflation which is likely to reach record levels and hard to contain. Therefore another reason for the rise in Gold is that investors are hedging them against future inflation.
– The broad based commodities rally in recent months has also had an impact on the price of Gold. After crude oil hit a low of $ 33 / barrel earlier this year it has been met by a very strong bid tone and this week broke above the $ 80 / barrel level. Traditionally as oil producers earn more money they tend to buy Gold for diversification.
-Traditionally companies that produce gold enter the futures markets in order to sell gold for delivery at some point in the future. This hedging behavior by gold producers is carried out in order to offset the risk that prices may decline between now and then. However, with online Gold trading at record levels this hedging mentality by gold producers is diminishing. Instead gold producers are unwinding their hedges and in order to do this they have to buy gold which absolutely pushes up the price of gold even more.
To conclude, gold prices should continue to rise in the medium term under current market conditions and a print of $ 1150 – $ 1250 / ounce is a realistic target for the precious metal.