Gold Hits New Record High - But Why?

| About: SPDR Gold (GLD)

By David Berman

There was nothing standing in gold’s way on Tuesday afternoon, with bullion prices hitting a new record high in nominal terms. Gold touched $1,452 an ounce, up about $19, stretching its gains to 10.5 per cent since it began to recover from an early year dip in late January.

This raises the question why -- which is rarely an easy question to answer when you're dealing with gold.

You certainly can’t blame recent comments from Federal Reserve chairman Ben Bernanke. In a speech on Monday, he downplayed the threat of inflation, noting that gains in various commodity prices would not likely translate into anything more than a “transitory” increase in inflation, with food and energy prices in particular likely stabilizing eventually. He added that if he’s wrong, the Fed would respond, presumably with higher interest rates.

So if inflation isn’t a problem, what is? Bloomberg News is calling the latest surge in gold a “chaos” hedge: Investors might be loading up on gold as a hedge against Portugal’s debt crisis, the ongoing conflict in Libya and the nuclear crisis in Japan. However, none of these three issues – which have been simmering for some time – was looking more chaotic on Tuesday afternoon.

Perhaps investors are merely responding to comments from Jing Ulrich, chair of China equities and commodities at JPMorgan Chase & Co. (NYSE:JPM). She said on Tuesday that China’s demand for gold will expand as official holdings rise. Right now, China’s gold holdings amount to 1,054 tonnes, an increase of 76 per cent since 2003.

“They probably have increased the holdings but we don’t know the figures,” she said, according to Bloomberg News. “It’s probably 2 to 3 per cent of the [foreign exchange] reserves, so it has potential to increase.”