Gold function debated while gold futures rose 10.4% in Q3

The U.S. Comex gold futures beat most of the other major markets and rose 10.4% in Q3 this year, the second largest quarterly increase since the 11.91% jump in Q2 2010. During Q3, the S&P 500 Index, the Euro Stoxx 50 Index, the CRB Commodities Index rose 6.35%, 9.01% and 8.84% respectively while the Dollar index fell 2.0%7. More than 50% of the move in gold price this quarter was probably because of anticipation of the U.S. QE,3 although the announcement of the ECB to buy unlimited bonds with attached conditionality and the ruling of the German court on the validity of the ESM structure also boosted gold prices. Gold futures further rose 0.25% early this week.

Manufacturing outlook in the U.S. has done a bit better than its European and Chinese counterparts. In September, the U.S. ISM index surged to 51.5 compared to 49.6 in August, helped by the improvement in the housing and auto markets. In the U.K. manufacturing contracted for the sixth month with the September PMI at 48.4. The Chinese September headline PMI at 49.8 contracted a second month although the data improved 0.6 point from that in August. Ben Bernanke commented on Tuesday that he could keep monetary conditions in the U.S. accommodative even after the economy strengthens and he viewed QE3 could boost stock prices which would help consumption and the labor market.

As gold price continues its positive run for the twelfth year, economists, analysts and fund managers are increasingly discussing and debating gold's functions and outlook. While both the fund managers at PIMCO and the UBS Senior International economist agree that gold holds an important position in a diversified portfolio, PIMCO views gold as a currency which does not pay any interest while the UBS economist calls the view that gold is a reserves currency, nonsense - gold supply cannot grow as fast as the rate of the world nominal GDP growth which is about 5 percent p.a. Nevertheless, during times of sovereign uncertainty and stimulative policies, gold demand will thrive as investors lose faith in fiat currencies and want an alternative store of value to hedge their investments.

About the Author
Austin Kiddle

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

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