Spot gold rose to a record high above $1,192.60 per ounce on Thursday. This is an extension of gains from yesterday when gold rose sharply and in contrast to the fall in the dollar which fell to a more than 15-month low against a basket of six currencies.
There are expectations for more central banks to buy gold and this might have led to the appreciation in the price of gold. Its typical for Indian consumers to buy gold in September in preparation for festivities season and wedding season but the interesting here is that even India’s central bank is buying gold. Russia is also adding more gold from its own gold mines.
The adding of gold by the Central banks have even mystified Barry Bosworth, a senior fellow at the Brookings Institution in Washington.
“Similarly, you’d expect oil exporters who are investing for future income to be fully diversified and want to hold less dollars,” he says.
It would seem more rational for commodity-exporting countries to shift toward holding a basket of currencies in their reserves, including currencies of some emerging markets, which are becoming more important trading partners, he says. Given China’s future prospects, it would make sense for central banks to diversify into the yuan, except that it isn’t a tradable currency, he says.
I feel that the choice central banks are losing trust in the value of currencies amidst a backdrop of low interest rates around the globe that would I believe stay as such for a very long time. This is also a response to the huge amounts of debt that many countries have accumulated and they have no other way but to print more money in other to get themselves out of this gripping recession that have yet to see more light.
It should be noted however that gold is not an asset but a store of value. As such, it would not earn its holder any interest except the profits from price appreciations. Gold investors are keeping their gold right now with the hope that someone somewhere in the future will buy their gold at a higher price. Its like a “Greater Fool” kind of situation that is rife among speculators. Nevertheless with the central banks coming into the picture with their hoards of cash, it will push the price upwards and fast.
I once told a few friends that gold would reach $1200 and he looked at me in slight disbelief. At that time, gold was at $600 and the sub-prime mess was just about to unfold, whereas the stocks were still at an all time high. Nevertheless it was still quite ok for my friends to enter actually on the buy side. Now that gold is reaching that targeted price of $1200, more people are thinking of buying gold.
I think gold have some way to go, all the way to February next year before a correction based on seasonal studies.
But these are just my thoughts and I think I will provide a gold chart in my next post to see where the major support and resistance points are.