Gold Glitters While Markets Tumble

Includes: GLD
by: Proactive Investor

Gold prices are continuing to hit record levels as investors continue their flight to safety amid ongoing concerns about the outlook for the global economy and sovereign debt. Some analysts suggest there could be yet more upside to the yellow metal yet.

The soaring price of gold reflects fears policy makers in Europe and US have lost control of the financial crisis, with virtually no more levers left for them to pull to effect a rescue from the parlous state of affairs.

As Shamim Mansoor, analyst at Daniel Stewart points out, it is notable that investors’ flight to gold is despite the European Central Bank yesterday starting to buy Italy and Spain’s debt.
Today, the ECB continued to buy those countries’ bonds in an effort to push their borrowing costs toward more sustainable levels and to prevent further contagion of the eurozone’s debt crisis.
Another major reason for the rush into gold was last Friday’s downgrade to the quality of US sovereign debt by Standard and Poor to AA+ from AAA. The downgrade means there are now 18 countries and seven global corporations with a better credit rating than that of the US government.
With the global economy on already shaky ground, the last thing investors needed was the dithering and incompetence of policymakers, with the chaotic last minute wrangling over US debt in Washington, and chronic indecisiveness amongst eurozone members providing all the reasons needed for investors to head for the exit door.
Another factor that has been supportive of gold this week has been Chinese economic data showing inflation accelerated at its fastest pace for three years in July - gold is often used by investors as a hedge against inflation.
The Chinese data also showed that July industrial output slowed in July, fuelling concerns of a slowing global economy and further underpinning support for safe haven assets like gold.
Today gold hit a record high of $1,778.30/ounce, rising 3.5% in early trade.
While current price levels for the metal look extraordinary, Mansoor at Daniel Stewart points out that, adjusted for inflation, gold is still well below the all time high of over $2,200/oz achieved in the 1980s.
Mansoor believes there is more upside to gold to come yet: “The sovereign debt crisis in Europe and the US, the turmoil in the global economy and gold’s negative correlation to the US dollar is likely to cause the gold price to remain at these levels or go higher.”
Mansoor is not alone, with Goldman Sachs analysts predicting gold prices will rise to $1,860/oz within 12 months. Broker JP Morgan is even more bullish and reckons the price could well reach $2,500/oz by the end of this year.

Disclosure: None