Will Gold Prices Continue to Rise?
With the price of gold once again nearing its all-time high, there is a clear argument that the risk of inflation and on-going concerns over instability in the eurozone will push the metal even higher.
On the other hand, dissenters suggest that a strengthening US dollar will keep prices in check and that the global economic recovery will direct investment into more conventional risk assets, ultimately driving gold prices down from these record levels.
A good inflation hedge
Due to its tangible nature, gold is traditionally seen as a safe haven during times of economic uncertainty and rising inflation. Broadly speaking, gold and the US dollar tend to trade inversely; the dollar is preferred when sentiment is bullish, while gold becomes the go-to option for bearish investors or those seeking an inflation hedge.
But as green shoots turns to full-on growth, the global trend towards loose monetary policy (which has helped economies during the downturn) may cause inflation at rates well beyond central bank targets. During March, UK inflation reached 3.4%, a significantly higher level than analysts expected and well above the Bank of England’s 2% target. If these levels of inflation continue and are replicated in other major economies, we may see a flight to gold as investors shield their portfolios from the risks associated with paper money.
The strengthening dollar
For those who feel gold has lost some of its lustre, the key argument is that a steady increase in the value of the dollar will hit dent the yellow metal’s value. With gold prices currently at around $1152 per ounce, relatively near the all-time high of $1225, the suggestion is that it will be particularly vulnerable to a stronger dollar and as we have discussed, the two markets often trade inversely, with investors tending towards one or the other for their portfolio.
Greek debt – good or bad for gold prices?
The alternating prospects of Greece either defaulting on its debt obligations or continuing to soak up vast pools of IMF credit to avoid doing so are still causing markets to wobble. The debt mountain casts a long shadow, affecting equities and forex alike and increasing the attractiveness of gold as a safe haven. For example, on April 27, we saw gold prices reach a week-high as uncertainty over Greece’s financial situation increased and equities fell.
However, the situation in Europe is a double-edged sword for gold bugs. While the crisis in Greece may weigh on sentiment, the main casualty of investor fear tends to be the euro. As such, the dollar will become a suitable alternative for some traders and tend to outperform the eurozone currency on the forex markets, thereby pressurising gold prices.
Take a position
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You can either ‘buy’ or ‘sell’ gold, with position sizes starting at just £1 per point and a dealing spread of just 0.5 points on our Daily Spot Gold market.
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The above comments do not constitute investment advice and IG Index accepts no responsibility for any use that may be made of them.
* Tax law can be changed or may differ depending on your personal circumstances
Updated: 27/04/10