Golden wonder approaches $2,000

Following recent rumours that the Indian government is considering a rise in import duty on gold, Chris Johnston assesses opinion on the likely trajectory of the precious metal into 2013

Since its global price was set at $35 an ounce by the Bretton Woods agreement in 1946, gold has been on a seemingly unstoppable rise, hitting a record high of $1,922 in September 2011.

After retreating from that stratospheric level earlier in the year, gold has resumed its upward march once more. Brenda Kelly, senior market strategist at CMC Markets, says that the prospect of more economic stimulus by central banks, such as the US Federal Reserve, would further boost the precious metal.

Gold has doubled in price since the Fed first started buying back government bonds in late-2008 following the financial crash. Very low interest rates in countries, such as Britain and the United States, since the crash have made gold more alluring to investors seeking safe alternatives to the poor returns offered by savings accounts and government bonds.

Ms Kelly says the gold price had recently breached the 200-day moving average of $1,643, stimulating the market as some investors scrambled to cover short positions. She expects gold to reach about $1,800 an ounce by Christmas, but predicts it may not rise much further past that level.

Gold has doubled in price since the Fed first started buying back government bonds in late-2008

Anne-Laure Tremblay, precious metals strategist at BNP Paribas, believes that the price of gold often fell in times of trouble because it is regarded as an insurance policy that investors could quickly liquidate to raise cash.

However, she adds: “It makes sense for investors to have gold in their portfolios as it is liquid, has no counterparty risk and the price is less volatile than other commodities.”

The price of gold is also affected by demand from China and India, the world’s two biggest gold markets, which account for 45 per cent of consumption. They differ markedly in that Indian buyers, who primarily purchase the metal in the form of jewellery, are deterred as the price rises, while those in China are more likely to pile in if they believe the price is on the rise.

As well as buying physical gold, which can be expensive to store, Ms Tremblay explains that investors could also choose exchange-traded funds that buy physical gold and can be bought into through stockbrokers.

She argues that the advent of such funds has made it less desirable to buy shares in gold miners such as Barrick Gold, the world’s largest gold producer, as another way of investing in gold.

As well as directing buying shares in gold miners, another strategy is a fund that invests in such companies. The BlackRock Gold & General Fund, for example, requires a minimum investment of £1,000.

Gold is also regarded as a hedge against inflation by some investors. As food and oil prices start to pick up and increase the inflation rate in some parts of the world, Ms Tremblay says that demand for gold should continue to rise. She expects the price to be around the $1,870 an ounce mark by the first quarter of 2013 as the lustre of gold becomes ever more alluring.