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After a record breaking price run in 2010, gold was one of the most watched commodities coming into 2011. Analysts were keen to make predictions as to whether the metal would continue its rally, or if prices would see a steep correction.
By Leia Toovey- Exclusive to Gold Investing News
In 2010, gold’s rally was fueled by impressive safe-haven demand for the metal as Greece and Ireland teetered on the brink of default, while other governments, particularly the US tried to stoke their economic recovery by printing money. So far in 2011, financial instability has continued, and arguably heightened, as the US struggled to pass its deficit and was subsequently downgraded by the S&P. At the same time, financial woes accelerated in the Eurozone. While financial concerns remained, other instabilities entered the picture, namely: exploding violence throughout the Middle East and North Africa, and the earthquake and subsequent nuclear disaster in Japan.
August gold prices have been on the upswing, with futures up 16 percent so far this month. Gold prices are on track to post their best monthly gain since 1999. This month’s rally has been attributed to both concerns over debt crises and also fears that another recession was on its way after a slew of disappointing manufacturing and employment figures were released. In August, the biggest gold-backed exchange-traded product surpassed its equities counterpart as the largest by market value, and gold bullion hit record prices around the globe.
Gold has rallied above $1,900 an ounce, however, the impetus of the rally has some questioning if the price point is sustainable. Gold’s rally to a record above $1,900 an ounce has pushed the metal to overbought levels according to technical analysis tools, as economist Dennis Gartman said prices will go “parabolic.” Bullion’s relative strength index has topped 70 since Aug. 5, a signal to some investors who study technical charts that prices may be set to decline. Wells Fargo & Co. (NYSE:WFC) said in an Aug. 15 report. Prices may climb to $2,000 an ounce by the end of the year, according to the median forecast in a Bloomberg survey of 13 traders and analysts.
The recent rally has gold ETFs matching their impressive performance in the aftermath of the global financial crisis, with gold ETFs up 28 percent since 2008. For comparison, the best performing equity mutual fund (excluding sector-oriented funds) moved up by just 7.4 percent and more than 200 funds (about one-fifth) are yet to move past their 2008 highs.
There are many other bullish data points to address when looking at gold’s performance so far in 2011. The World Gold Council reported that demand for gold as an investment was up 26 percent on a year-over-year basis during the first quarter. In China, demand for gold was so strong it outpaced the combined gold demand of the US, France, Germany, Italy, Switzerland, the UK and other European countries.
Traders think the biggest headwind that gold prices may face is rising interest rates. While it may be hard to think about rising interest rates in economies such as the Eurozone and the United States, who are still grappling with an actual recovery, when it comes to the US interest rates could rise as a fall-out of the nation’s credit rating downgrade. Almost everyone can agree that economic and political uncertainty is positive for gold prices, however, in terms of interest rates, rising interest rates are generally only negative for gold prices when real interest rates turn positive. (Real interest rates are positive when the interest rate is higher than the inflation rate.) The European Central Bank and China have been fairly aggressive with tightening monetary policy in 2011 and more rate hikes are expected. If real interest rates turn positive gold could lose its appeal as a better investment alternative than paper currency, and will most likely see a steep price correction.
Securities Disclosure: I, Leia Toovey, hold an equity interest in Wells Fargo and Company (NYSE:WFC)