Uncertainty lifts gold and silver to record highs
While uncertainty in the markets grows, gold and silver continue to soar. It seems that cautious investors see the precious metals as an investment hedge against an uncertain future. Geopolitical concerns, euro zone debt problems and inflation pressures are the main drivers of their upward trend.
Gold and silver have traditionally been considered a safe haven investment as they are commonly perceived to be a reliable store of value. Investors buy the precious metals due to their safe haven appeal in political, social or economical uncertain situations. When things become risky and uncertain, demand for gold and silver rises because no matter what happens they will always be precious, valuable and a sign of wealth.
Recent geopolitical events led investors to seek for safe haven bets as confidence in paper money eroded. Fighting in Libya continues while concerns about oil supplies intensified. Oil, in turn, soared to record high levels becoming more expensive and increasing the risk for global price instability. In Japan, the nuclear crisis resumes with workers still struggling to repair the Fukushima nuclear power plant.
Euro zone debt problems continue to be a catalyst for the precious metal rally. Greece's debt crisis deepened and to make matters worse the country is closer to a debt restructuring. Portugal also requested for a bailout from the EU and speculators expect Spain to be the next country looking for financial help. While debt contagion fears heighten, the European Central Bank (ECB) is battling to control rising price levels. The ECB hiked interest rates in April and economists expect more rate hikes in the near term. The Bank of England may also raise interest rates due to inflation pressures. Central banks' monetary tightening moves are creating an uncertain environment in the markets while recession still remains a thread. By tightening their policy, Europe is risking a debt contagion and the UK risks falling into a double dip recession. The monetary uncertainty in Europe and the UK offers support for gold and silver as investors turn to the precious metals to hedge their investments from monetary uncertainty.
Uncertainty in the markets deepened after rating agency Standard and Poor's put US sovereign debt on a negative outlook. The US economy is considered a safe haven for investors in times of global turmoil. But what happens when the global safe harbor risks losing its safe haven appeal? The US dollar has been gradually falling, losing its value and in investors' eyes the dollar began losing its sparkle. Heightened risk aversion combining with the dollar losing its luster resulted in higher demand for gold and silver.
The precious metals appear to defy the laws of gravity making fresh highs every day. Silver gained 74.6% hitting a 31 year high at 46.05 dollars an ounce from 26.38 since the start of the new year. Gold struck a record high breaking above 1500 dollars an ounce and rising to 1508.82 from 1308.08 gaining 15.3%. Silver outperforms its more expensive counterpart and the gold/silver ratio hit a record low. The correlation between gold and silver remains strong indicating that the two metals will continue moving at the same direction. Economists expect gold and silver to continue moving higher as investors seem reluctant to abandon their safe haven bets.
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