The recent rise in the gold price into the $900 range is indicative of the long-awaited (by gold followers at least) rerating of the yellow metal as a store of wealth - or an insurance policy if you like - in the light of the realisation that the global financial turmoil is unlikely to end soon. Initially, once the state of the global economy became apparent to the investment community, the unprecedented speed of the market collapse took the financial world by storm and gold holdings needed to be sold along with everything else to meet other financial commitments. As a result gold lost its lustre and many felt that, as it did not seem to be performing as experts had predicted in a financial meltdown, it did not meet its rating as a safe store of wealth.
But some did not falter in their belief for gold and the price started being underpinned by increasing purchases of metal (in coin and small bar form), to the extent that mints in some countries started running out of investment coins, alongside a steady build up in ETF investment. A fall in jewellery sales in the traditional strong gold markets of the Middle East and Asia, though tempered the price rises but even so gold slowly but surely moved upwards while other markets faltered. In the event, gold ended 2008 as one of the few investments that gained in value over the full year (although it remained well below its peak achieved early in the year in March). Central Bank sales have also come back with sales under the Central Bank Gold Agreement gold sales programme at their lowest level since it began. Such sales are not anticipated to rise again sharply in the current year.
Since the start of 2009 gold has held up well and slowly and stutteringly moved forward - remarkably as much of this has been alongside a rising US dollar and normally the two move in opposite directions. This suggests that the flow of money into gold will continue to rise, and the gold price rise with it. Indeed, from its low point in mid October the gold price in dollars has advanced more than 30 percent - and with the strong dollar this means that in virtually all other major currencies (excluding the Japanese yen) gold is already at new record levels.
Gold stocks have performed even better than the metal itself - with a gold based fund like the BlackRock Gold & General rising over 70 percent over the same period. Many individual stocks have substantially outperformed this and overall, gold stocks have more than doubled in price from their collective low points - although are still well below their peaks suggesting that there is further traction in the stocks sector too.
There appears to be a strong belief among mainstream economists that the recent strength in the US dollar is just not sustainable even in the medium term, and that long term the dollar could be set for a major fall as the logic of the huge and rising U.S. deficit is that at some stage the currency will start to decline again. Given that the dollar has confounded analysts in the recent past as other economies have proven to be just as, if not more, vulnerable than that of the U.S., this is not something one could bank on, but if it does come about then the rise in the gold price in U.S. dollar terms could be rapid and dramatic.
Even without a return to dollar weakness vis a vis other major currencies, the $1,000 gold price barrier looks to be very vulnerable as money continues to move into yellow metal, but the upwards move is unlikely yet to be a smooth one. When the price moves up in a sharp burst, some will take profits causing it to fall back a little and this is likely to remain the pattern for the short term at least, but each upward step may well be bigger than the previous one. It would certainly not be unrealistic to think that the price may breach $1,000 again within the next couple of months. It would seem that the force would definitely seem to be with gold for the moment.