Gold on track to fulfills its multiple roles

On Thursday, gold futures had its biggest one-day rally of 1.22% since Feb. 21. This week gold has rallied more than 3%, helped by the re-assurance of two U.S. Fed governors that U.S. interest rate will remain low until late 2014 and the U.S. recovery is not 100% certain. Since the April's trough at $1,613, gold has climbed $67.

Market's hope of QE3 is re-ignited, fuelling commodities and S&P, which rose 1.7% and 2.1% respectively, while hurting dollar index, which fell 0.7%, since the Fed's comments came out. Dollar also declined after the U.S. Labor Department reported a higher than expected jobless claims of 380,000, a two-month high.

While investors and traders are speculating whether the U.S. Fed will engage in QE3 or not and where gold price may head, the Euro crisis still has a major bearing on gold price. Europe is simultaneously facing three crises: Banking, debt and economic growth crises. According to Jefferies' Chief European economist, Europe needs to see enough growth to escape from the worst of its problems. To have growth, the ECB may end up engaging in a fully transparent quantitative easing policy, perhaps as soon as the third quarter, if economic conditions remain distressed.

The latest GFMS gold survey predicted that gold investment demand, especially physical gold demand, is the current key driver of gold prices and can reach 2,000 tonnes in 2012. Central banks, which became net buyers of 400 metric tonnes in 2011, will remain gold buyers in 2012.

However, the head of Metals Analytics of GFMS also warned that production supply will continue to grow at 3% this year as producers are motivated by higher prices, producer hedging will probably go up after 10 years of de-hedging and investment demand will need to rise as much as $130 billion in order to fill the gap between supply (mining plus scraps) and fabrication demand.

GFMS predicts gold price will trade this year in the range of $1,530 to $1,920, the peak reached in early September, 2011, and will likely pass $2,000 in early 2013. For now, gold continues to fulfill its role as a safe asset, an inflation hedge and according to World Gold Council, a foundation asset in portfolios.

About the Author
Austin Kiddle

Austin Kiddle is a director of the London-based gold broker Sharps Pixley Ltd.

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