Gold prices made record highs Tuesday, surging above $880 an oz., breaking its previous record of $875 an oz., set in 1980 after events in Iran.
Behind the recent stunning rise in gold prices is the steep fall in the value of the US dollar, which has prompted hedge and pension funds as well as long term investors to diversify into gold as an investment. Helping the trend is the growing anxiety that the US economy is not only slipping into recession but may also have to face continued inflationary pressures due to stubbornly high commodity prices. All commodities are at record or near record levels,particularly crude oil, which continues to hover near $100 per barrel.There is some 'safe haven' buying also, as tensions rise between the US and Iran, and because of geopolitical worries in Pakistan and Kenya.
Analysts and traders alike feel that the trend in gold prices is clearly up, as the likely response to the global financial crunch is a cut in interest rates globally, which will fuel inflation worldwide. Therefore, although the rise in gold prices was triggered by by the decline in the US dollar, it is the fear of looming inflation that is behind the current rally.Most analysts feel that the price of gold should touch $1000 an oz. in 2008 itself.They point out that although gold prices are at an all time high, they are still below the 1980 price if it is adjusted for inflation. If this is done then an oz. of gold at $875 in 1980 will be worth $2,115 to $2,200 today.Therefore there is clearly room for gold prices to appreciate further.
Another important reason behind the rise in gold prices is the increasing physical demand for the yellow metal from China and India where gold has always been prized as an asset.Their increasingly affluent middle class has increased its demand for gold.At the same time existing mines have not been able to increase output significantly.They are also having to dig deeper to get to the known deposits, which has raised the cost of production. Gold has also been boosted by the impending launch of the Shanghai gold futures contract. If the Chinese appetite for stocks is any indication then investment in gold futures seems to be a safe bet.