Monday, September 12, 2011

Is it still a good time to invest in gold?

The price of gold is touching record highs every day. Gold's 34 percent rally this year has been due to investor worries over the US and Euro zone debt burdens, and their impact on currency markets. The rise in the price of gold reflects the lack of trust and faith investors have in governments and their central banks. As governments continue to print money, investors are forced to flee to hard currencies like gold.

Gold prices will rally in the short term again if the US Fed goes for another round of quantitative easing (QE3). Investors are increasingly unconvinced of European leaders' abilities to tackle the regional debt crises as well as the US government's ability to push its economy, and are expecting one more round of quantitative easing. Signs of a slowing global growth rate may force central banks to step up stimulus measures. QE3 may become necessary because the stoppage of money supply can cause interest rates to go up and rising interest rates will choke whatever nascent recovery the US economy has had so far.

Safe haven

Gold's 'safe haven' status received another boost when Switzerland's central bank set a limit on how much the Swiss Franc can gain. Investors have poured money into the Swiss Franc, which they see as one of the few safe places for assets amid global financial turmoil. Investors saw it as another safe haven along with gold. The Swiss Franc strengthened, causing worries that its export-driven economy will be damaged by the currency's strength.

This compelled the Swiss national bank to peg the currency to the Euro to wean investors away from hoarding their wealth in Swiss Francs. Today, analysts are strictly divided into two camps. The first believes that gold has rallied in a fast and furious manner and is hence poised for a deep correction . They contest that speculative buying pushed the gold market into a bubble that is poised to burst, while others believe that as long as the currency markets are in turmoil gold will continue to rise. They are of the opinion that gold's claim to safe haven status will continue for some time.

Short-term outlook

The US Fed's Chairman, Ben Bernanke, finds the rise in the price of gold illogical. Bernanke said the rise was mainly due to 'tradition' and not because of anything intrinsic. The well-known economist Paul Krugman said gold prices will go up swiftly in the short run but will taper off as people are buying gold not as a protection against inflation but because other types of investments are not yielding any returns. 

Source : ET

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