Is this a modern-day gold rush? The price of bullion jumped to its highest level since March 1996 last week as speculators continued to chase commodities. Gold has been a good performer this year,rising from $351 per troy oz in January to start the week at $383.40. More buying from hedge funds pushed the price higher, before it closed on Friday at a seven-year high of $395.50, up 3.2 percent.
What has been surprising about the rally is the background to it. Historically, investors have been attracted to gold for its security, and prices have been strong during times of uncertainty in financial markets. But the recent surge coincides with robust equity markets and greater confidence about economic growth. And it hasn’t been driven by any improvement in physical demand. Two-thirds of the world’s gold is used for jewellery, but consumers these days have a preference for platinum.
So why is gold going up? Unlike other commodities, its key driver is sentiment, not fundamentals. And the biggest interest in bullion has come from hedge funds, which see it as a safe haven from the weak US dollar and renewed tensions in the Middle East.
Meanwhile, the fundamentals deteriorate. Higher prices are encouraging mining companies to increase production, while central banks, which still own large reserves of the glittering stuff, continue to sell down their holdings.
No doubt the momentum in the gold price is working to the speculators’ advantage. But when the trend goes against them, hedge funds will find themselves in trouble, just like the pioneers in the first gold rush.
