When all that jitters buys gold

The price of the precious metal broke through $1,300 yesterday, and it is likely to rise even further, writes Sarah Arnott
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The Independent Online

Throughout human history, gold has always had a special status.

The metal the Aztecs knew as "the excrement of the gods" has stood for everything – from wealth to purity and religion – across countless civilisations. For modern investors, too, gold is in a class of its own – with the price soaring to an all-time high of $1,300.07 an ounce yesterday in London, passing $1,300 for the first time.

Gold is the ultimate haven from market gyrations and this week's flurry of activity followed hints from the Federal Reserve on Wednesday that the lacklustre US economy may need another round of quantitative easing (QE). "The markets have concluded that slow growth or a further recession may be imminent and the Fed will buy bonds and weaken the dollar to prevent it," said Marcus Grubb, the head of investment at the World Gold Council (WGC). "The real fear is that the Fed does so without stimulating economic growth and in that case, the asset of choice is gold."

But it is not just the Fed sparking currency concerns. Potential interventions by the Japanese government to curb the over-strong yen are playing into similar fears, which were already stoked by the first round of QE in a number of developed economies last year. And with currencies set to weaken, investors turn to gold.

"We are all brought up on stories of pieces of eight and so on, so gold has a certain romance deep in people's psyches," said Ian Henderson, the manager of a natural resources fund at JP Morgan. "But this is not just the usual gold bulls, it is also more level-headed investors who think that what central banks around the world are doing is debasing their currencies."

QE is not the only uncertainty prodding the cautious towards gold. There are also broader worries about a double-dip recession and on-going concern about the future of eurozone as weaker economies such as Ireland and Greece struggle with their debts. Add in meagre interest rates reducing the return on bank deposits of cash, and the case for holding gold becomes even more compelling – helped by the easy availability of exchange-traded funds (ETFs) allowing investors to buy into the metal without the hassle of the physical bars and coins.

In a bull run on a scale not seen since the 1920s, the gold price has now been on the up since 2004. But what began as a trickle became a torrent when the financial crisis knocked global economic confidence in 2008. During the past 12 months alone, gold has shot up by nearly a fifth. It is up by a staggering 84 per cent since mid-2007. Tom Kendall, a precious metals analyst at Credit Suisse, said: "The safety aspect of gold is still very much in play."

The booming demand behind the steadily rising price is evident from the most recent report from the WGC. In the three months to June, total global demand shot up by more than a third to 1,050 tonnes, or by 77 per cent to a quarterly record of $40.4bn in value terms. Some of the boost came from rising demand for physical gold in bars or coins, which rose 29 per cent. But the biggest impetus came from a 118 per cent rise in investment demand, within which ETFs in the developed world more than quadrupled to account for 291 tonnes out of the 534-tonne total.

Individuals are not the only ones turning to gold. National reserve banks, particularly in the developing world, have also been piling in. Bangladesh was the most recent buyer, picking up $403m-worth from the International Monetary Fund's 403-tonne stock earlier this month. But China, Russia, India and Sri Lanka have all added to their reserves in recent years, to diversify their holdings.

"There is no single thing driving this bull run," Mr Kendall said. "It is partly currency concerns, partly worries about the effect of another round of QE on both currencies and inflation, partly concerns about the stability of the eurozone, and also rising physical demand from central banks."

And it's not over yet. Even the most cautious analysts believe gold will hit $1,350 in the foreseeable future, with some going as high as $1,600 in the next 12 months. But the good news is that gold's gains may have been stellar, but, unlike silver, they have also been reassuringly gradual. "Gold prices have risen for some time, but in a series of moderate steps, so they are likely to be sustainable," Mr Kendall said.

Investors take a shine to silver too

Precious Metals

Gold is not the only precious metal to be making record-breaking gains this week. Silver has also clocked up a series of multi-year highs since Monday, and yesterday hit $21.41 an ounce, its highest nominal price since the 1980s.

To some extent, the trend in the silver price is correlated with its more glamorous counterpart – although it tends to see wilder fluctuations. In part the two metals are linked through the jewellery market. Demand for gold in investment products such as exchange-traded funds (ETFs) has only recently outstripped the demand from jewellery markets, particularly in India but increasingly in China and Middle Eastern economies as well. And as gold becomes more expensive, some jewellery buyers go for silver instead.

"It is not really fair to call silver 'poor man's gold', but it does regain some market share when the gold price makes significant gains," Tom Kendall, a precious metals analyst at Credit Suisse, said.

Recent price rises have been helped by strong inflow into US-based silver ETFs, along with the more gradual pull from improving economic conditions. Gold draws investors looking for a safe haven, and sees only limited gains from industrial demand. In contrast, silver's more widespread uses – particularly in electronics – are already seeing a boost as recession recedes.

But profit-hungry investors should beware, Mr Kendall warns. Silver is currently outperforming gold quite significantly – rising about 20 per cent in the past four weeks alone. "The cautionary note is that silver prices often come down just as fast they go up," he said. "The rapid rises of the last month are simply not sustainable."