Does the scramble for the yellow metal signal a flight to safety

Does the scramble for the yellow metal signal a flight to safety

Gold prices hit a record $1,663.8 an ounce (around 2,500 per gram) on Friday. The price has doubled since 2008 when a financial meltdown threatened the globe. And since January, it has appreciated 17.6%.

Yet investors the world over seem to be pouring money into the yellow metal, with frenzied buying by central banks of various countries, fund houses and even retail investors and consumers who have jumped on the bandwagon.

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The weekend seems to have given the final blow to the US authorities’ efforts to lift the country out of its financial mess. A ratings downgrade by Standard and Poor’s (S&P) only reaffirms Friday’s meltdown of global equity indices, which reflects failing confidence in the ability of the two big economic blocs’—the US and Europe—to resolve their financial problems. Data suggests that US debt-to-GDP ratio lags behind only Japan and Italy among developed nations, with debt at around 98% of GDP.

All these factors, together with mounting volatility in commodities and currencies, and a lack of confidence in sovereign paper, has seen investors’ flock to gold as a safe haven. A weakened dollar, too, has been gold’s best friend. Data from the World Gold Council shows gold prices have seen an upward march for the last eight quarters. While jewellery demand grew by 7%, global investment demand (in bars and coins) during the first quarter of calendar year 2011 jumped 26% in volume from a year ago.

However, supply contracted by 4% in the period, which explains the scorching rise in the price of gold. Also, inflows in gold exchange traded funds have been rising, save a blip in January. The Indian bullion markets have not shown any divergence from global trends.

Central banks have raised their gold reserves in the recent past. With more and more countries diversifying away from the dollar, that source of demand could continue.

In the near term, much depends on what the US Federal Open Markets Committee says, or does, this week.

However, Morgan Stanley on Friday raised its gold price forecast by 8% for end-2011 to $1,511 per ounce. This, however, is still below Friday’s price.

Graphic by Sandeep Bhatnagar/Mint

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