Gold continued its big rally Wednesday, nearing $1,250 an ounce in intra-day trade, then slipping a bit to settle at a new high. Stock market jitters and Europe's debt troubles have sent investors flocking to the precious metal, but why?
Low risk in volatile times
Of course, gold is considered a safe-haven investment in times of economic uncertainty. After the stock market's so-called "flash crash" last week, gold jumped 2%. Choppy trading since then has further boosted the metal's appeal. Gold for June delivery rose $28.80, or about 1.87%, to $1,243.10 an ounce Wednesday, beating a record $1,220.30 the day before, on the Chicago Mercantile Exchange. Still, when adusted for inflation, current prices are far from their true peak in 1980, when they hit $825.50 an ounce, or the equivalent of $2,180.27 in 2010 dollars.
It's tangible
This week's gold "mania" is also partly a result of investors shifting out of paper currencies, said Adam Klopfenstein, senior market strategist at commodities brokerage firm Lind-Waldock. The dollar, euro and yen are often seen as low-risk investments, too, but gold is not as vulnerable to currency-vs.-currency moves, he said. Gold is experiencing strong demand from Europeans lately, as investors there worry the region's debt problems will persist and devalue the euro, Klopfenstein said. "Gold is the market that Europeans want to own. Their money is going into gold because at some point, people who have already been burned by their own currency want to own something tangible," he said.
Inflation fears
Investors also are buying gold to hedge against the possibility of rising prices. The Federal Reserve's expansionary monetary policy has investors worried about inflation, and Europe's nearly $1 trillion rescue package fans the flames on those fears, said Jeffrey Nichols, managing director of American Precious Metals Advisors and senior economic adviser to Rosland Capital. Nichols has, for the last year, predicted that gold would reach a new high by the middle of 2010 and expects a continued upward trend will put gold at $1,500 per ounce or higher by the end of the year.
Foreign banks
Foreign central banks that are stockpiling gold also are fueling the rally, said Carlos Sanchez, director of risk management at commodities research firm CPM Group. Countries like China and India have been steadily increasing their gold reserves to reduce their vulnerability to the dollar's moves, he said. It's a tactic that gained steam during the global financial crisis in 2008, when the dollar tanked against the euro and other major currencies, Sanchez said. Russia, Kazakhstan and Venezuela also are big gold buyers, he said. Still, the U.S. remains the biggest hoarder, with about 261.4 million ounces of gold in its reserves, although analysts say it hasn't been buying gold for at least a decade.
Bigger returns than bonds?
Treasurys, another safe-haven investment, have also rallied recently. But gold glitters a bit more with some investors, who are turned off by relatively low yields around 3.5% on 10-year government bonds. Gold may not pay interest like bonds, but investors know that with prices rising about 2% daily on a good day, they can potentially make more money in a week with gold than they can in a year with bonds, Klopfenstein said.
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