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Gold sets new highs on investor fears

Finance Blogger: Anthony Harrington Anthony Harrington

If there is anything surprising about gold moving to new record highs on the back of the unrest in North Africa and fears that the Persian Gulf could get drawn in to the changes sweeping autocrats from power, it is that it has taken this long for gold to surge past the highs it set on March 24 when Portuguese prime minister Jose Socrates became the latest victim of the euro sovereign debt jitters. The price on April 6 hit a new record of $1462.90.

Frankly, in common with just about everyone, I had been expecting the gold price to soar, but for several days it meandered up and down the $1430 to $1439 range, seemingly unable to break through the $1440 mark. One of the factors holding it back might have been the strengthening of the US dollar as investors moved back into dollars as the deepest pool of liquidity around. This penchant for the dollar is not an unusual phenomenon in times of global stress, particularly when the US economy isn’t itself the prime cause of the stress.

The thinking here is that as the dollar moves up against other currencies, you get more gold for your dollar and the price of gold falls. It is not an infallible linkage. It is possible sometimes for gold and the dollar to rise, usually if investor fears wash into gold even more vigorously than they are washing into dollars. This downward pressure somewhat cancelled the upward pressure of investors piling into gold as a safe haven, hence the yo-yo’ing around in the fourteen-thirties.

However, hints by European Central Bank president Jean-Claude Trichet that inflation could be setting in and is almost certain to warrant a rate increase when the ECB policy committee sits on Thursday April 7, have made the euro appreciate strongly against the dollar through and April 5 and 6. According to the Daily Telegraph, the euro is now on a 14-month high against the dollar, at $1.4317. This weakening of the dollar seems to have been sufficient to take the lid off gold, allowing it to surge forward.

Whether gold can hold this new high ground for a while or perhaps even surge higher remains to be seen. There has been no shortage of expert opinion pointing out that if Saudi Arabia gets caught up significantly in the wave of unrest sweeping the Middle East then gold can be expected to burst through the $1500 mark.

For businesses outside of the gold producing sector who generally couldn’t care what the price of gold might be doing, the chief correlation to watch is the fact that gold is just one of a number of commodities setting record highs. Brent crude was back through the $122 mark on Wednesday 6 April, and is now at a 30-month high. The FT makes a very interesting point, however, which is that this gold rush is not being conducted at the expense of risk assets, which are still seeing plenty of positive activity, with the S&P, the DAX, and the FTSE all gaining ground.

Further reading on the markets and asset bubbles



Tags: asset price bubbles , commodities , European Central Bank , gold , gold price , Jean-Claude Trichet , North Africa , oil prices , Portugal , US dollar
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