The yellow metal has gained 85% and hit an 18-year high since bottoming at $256 in early 2001. But the big news, says Adam Hamilton on Zealllc.com, is that it has been posting new highs in other major currencies too. In euros it has finally broken through the €330 level and is now challenging €400; valued in yen and sterling it is also at multi-year highs.
This strongly suggests that gold is decoupling from its link to the dollar, and that the bull market is set to enter a second stage where rises in all currencies become self-reinforcing as they stimulate investment demand, which in turn forces prices up, creating a virtuous circle, says Hamilton.
Worries over inflation should also continue to underpin gold, says Finanzwoche. History shows that huge increases in the money supply — global liquidity growth has hit a 30-year high over the past two years — always lead to substantial jumps in inflation a few years later.
Solid fundamentals add to gold’s appeal, with demand outpacing supply and mines struggling to boost production. Gold’s long-term relationship with oil and stocks also indicate that this bull is far from over. The gold/oil ratio is close to an extreme low, with an ounce of gold costing just seven barrels of oil, while Adenforecast.com notes that the Dow Jones to gold ratio is currently at 22 (10,300 divided by 475).
This is down from a peak of 40 in 1999, but the ratio is in a downtrend and “tends to swing to extremes once a shift occurs”. It’s still far from its historical lows of around five, so gold is likely to outperform stocks “for years to come”,
Recommended further reading:
A full list of articles may be found in our section on investing in gold, including when’s the best time to buy gold, how to buy gold and Merryn Somerset-Webb’s article: Why you’ll regret it if you don’t buy gold.