In recent days Gold prices have surged to 960$ with looming worries the US will lose its AAA credit rating. The US quantitative easing program alongside a record budget deficit and fears of a US credit downgrade spurred a massive move out of the US Dollar across the board and into alternative currencies and assets. Gold being one of the world’s safest tangible assets and a reserve currency of its own, gained strongly from this move with a rise in prices of over 8%.But what is next for the precious metal?
With Gold prices close to the 1000$ mark, weak demand for jewelry around the globe and the IMF intention to sell 400 Tones of the precious metal, can Gold prices continue to surge? To tackle this question we must point out the force behind this Gold price rise and its future relevance. The price of Gold has been increasing mainly due to record government spending and an even larger scale of spending predicted in the future. The record deficits of governments around the globe as well as worldwide aggressive monetary expansions increase the monetary base worldwide.
The move which might stimulate the world economy has its downside which is the devaluation of currencies. The fiscal indiscipline and monetary loosening has created a void which brings much unrest to the already unsettled currency market and propels investors and governments alike to look for alternatives reserve allocations. Gold is already a reserve asset and is a natural candidate to step up and fill this empty void. Even China which is the world’s biggest US Treasuries holder is shifting some of its reserves to Gold and is currently aiming to be one of the world’s biggest Gold holders relatively to its size in the world economy.
Since china is ranked around eighth in the world in reference to global Gold reserves, the Chinese are expected to continue to steadily increase their holdings of the metal. Although the intention of the IMF to sell large quantities of gold is expected to place some pressure on Gold prices, the effect will be limited as most of the IMF gold sales are expected to take place under extreme secrecy and undisclosed contracts. Eventually, we must remember that the drive behind gold prices is the weak fundamentals of the currency market caused by fiscal and monetary instability. Since both factors are expected to continue disrupting the stability of the world currency markets for some time to come, the demand for gold will eventually surpass supply and gold prices will be driven to the 1,000$ mark and beyond. The question is not whether gold will reach 1,000$, but when?
Please acknowledge this is strictly the writer opinion and does not pose an investment or a trade advice in any sort or way.
