By Kishori Krishnan Exclusive To Gold Investing News
The price of gold has touched an all-time high for a third consecutive day - after a continued decline in the dollar kept it attractive to investors.
Gold reached $1,058 an ounce on Thursday, powering past Wednesday’s high of $1,048.4. On Tuesday, it passed the $1,033.9 an ounce record set in March last year.
Top miners Barrick Gold (TSE:ABX) in Toronto and Newmont Mining (TSE:NMC) in New York rose 4 per cent and 7 per cent respectively on Wednesday, while small players such as Eldorado Gold (AMEX:EGO), up 10 per cent, fared even better.
The S&P/TSX global gold index, which tracks mid to large-sized gold miners in several markets, rose 5.3 per cent, as analysts predicted the breach of its previous record suggested a continued run.
Analysts maintain that there was still potential for prices to rise further if the dollar remained weak.
Gold bulls see runaway inflation and US dollar weakness sparking the latest stampede into the metal. Gold equities are still about 10 per cent below their record levels - as measured by the TSX gold index.
But, is it a mere speculative bubble waiting to burst? Or is the US dollar intending to hitch a northward ride on the back of rising gold prices, as was predicted at the start of the year?
Historically, it has been noticed that there has been an inverse relation between the price of gold and the United States (US) dollar, the global reserve currency.
Whenever the dollar has moved up, the price of gold has dropped, and vise versa.
But of late, say around 14 months ago, this relationship has seen a change, one which has got the money markets analysts as well as global bankers and economists in a tizzy, sparking off a new debate.
Coming just at the start of the global recession, it has been observed that the price of gold and the US dollar have moved in tandem. The trend was mapped between January-March 2009, and was expected to repeat itself towards the end of this year.
Bang on. On September 7, gold bucked the inverse trend with the dollar, when both had traded on the up.
Wither from here?
Will gold and the USD find a common purpose and move together? On the face of it, it does not look like the analysts predictions of gold and USD going up together will happen by 2009-end or even the next year.
There are several reasons for this: The dollar continues to weaken globally post recession, and there is already talk of it being replaced as the global currency. Gold, on the other hand, continues to rise in the international market.
Also, even at such high levels, there haven’t been any reports of redemptions from exchange-traded funds (ETFs) which implies that people are holding on to their gold, hoping for a further rise in prices.
Sharing his perspective on where the asset class is headed, Commodity Guru Jim Rogers told India’s business channel, CNBC/TV18 that gold would touch higher levels over the next decade.
His advice - don’t buy gold at such highs, but also do not sell your existing stock because gold is expected to go even higher in the next decade.
Blame the President
Some conservatives are even blaming the rise of gold and the slide of the dollar on President Obama and congressional Democrats.
They maintain that if the United States government is living beyond its means, including spending $1.4 trillion a year more than it collects in taxes, then it is small surprise that the once-mighty US dollar is sliding as fast as Congress’ approval ratings.
If this trend continues, analysts add, then the President’s conservative critics will be proven correct: the dollar’s fall is a message to the White House and congressional Democrats to rein in spending.
Geopolitical risk & recession
The price of gold is also linked to geopolitical tensions, like the one in Iraq or Afghanistan. Periods of uncertainty have sparked an uptrend in the price of precious metals.
During recessionary periods, the price of gold and the US dollar appreciate together, failing the inverse relationship in the short-run. In the long-term, the inverse trend between gold and the US dollar tends to hold.
The general market meltdown first emerged strongly around October 2007, when the US’s subprime credit crisis started taking casualties, and intensified with the fall of Bear Stearns on Wall Street in March 2008, when gold bullion hit its previous record.
Another intense markets sell off was triggered by the fall of Lehman Bros, also on Wall Street, in September 2008. Stock markets started to recover during the first week of March this year.
Barrick (ABX), the world’s biggest gold digger by production and market value, traded above US$53.00 a share in early 2008, before crashing to US$17.27 a share in the weeks following the Lehman collapse. Barrick was trading up close to US$40.00 a share on Tuesday.
Moreover, when Australia unexpectedly raised interest rates, the dollar sustained renewed pressure. With signals that other developed economies may raise interest rates, investors are betting that inflation rates will rise, underpinning an ongoing switch of funds to hard assets such as gold bullion.
All of these are signals that gold is not only a long-term hedge against inflation, but a short-term hedge against crises.
Today, gold is acting like the ultimate currency and it appears to have just begun its ascent.