Gold has continued to make fresh all-time highs throughout 2010 as a weakening US dollar caused investors to look for a safer option in which to place their assets.
With gold at record highs, there is the temptation for traders to believe that the move is mostly finished. However, markets that make new highs are actually likely to keep going higher. Is this likely in the case of gold?
According to Macquarie Private Wealth head of research Riccardo Briganti there are many factors driving gold’s gains.
“The major drivers of the gold price over the past couple of years have come together in 2010 to really push god higher,” he said.
“These factors include the falling US dollar, the pure ‘fear’ trade as concerns about European and US banks continue to frighten investors and, perhaps most importantly in recent months, investors looking to hold gold as a hedge against inflation.”
How far can gold keep going? There are numerous opinions when it comes to this most closely-watched of the commodities, with some analysts saying it could trade to US$2000 or even $5000.
Can this really happen to gold? Briganti said anything could happen in financial markets – and most traders would be inclined to believe him.
“Everything is possible, but we wouldn’t expect such a move in the very near term. So, not in the next two to three years, but it is possible in the next 10 years, depending on the performance of other commodities,” he said.
“Look at oil, for example. When it went to US$100 per barrel in 2007, everyone in the market said it was going to US$200. The history of the gold price is very similar to the history of the oil price.”
Gold has a history of giving traders a nasty shock. Most famously, it collapsed in price in January 1980, after making an all-time high of US$850. Gold fell back to US$620 by the end of the month, before trading below US$500 by the end of March.
Briganti said a 1980-style collapse was unlikely in the near-term.
“In the early 1980s, the sharp rise in the gold price was due to the US Federal Reserve embarking on a concerted effort to crush inflation. We are currently in an environment that is the polar opposite of that time.”
When will it end?
According to Briganti, gold is likely to remain buoyant as long as the US Federal Reserve continues to try to encourage growth and inflation through policy.
Most recently, the Fed’s move to buy $600 billion worth of bonds, in a measure known as quantitative easing, has signalled that the Fed remains resolutely on the path to drive inflation higher.
“When we hear that the Fed is looking to rein in inflation, then we might see gold start to ease,” he said. We are unlikely to hear such commentary from the Fed until late 2011, Briganti said. “Until then, the most likely trajectory for gold is sideways or higher,” he concluded.