Gold Prices Levitate to New Highs: Reasons and Implications

2007 has probably been one of the greatest years for the commodity market where there has been exuberance across the globe. Gold has been one of the beneficiaries that has witnessed one of the most phenomenal and unprecedented increase in prices. Prices have been up by almost 80% in the last 2 years and approximately 35% during the year 2007.

Gold has generally been a counter-cyclical commodity. This is the reason why a general downturn in the economy is always accompanied by a rise in Gold prices. This time around, the increase was perpetrated by a rise in oil prices, and the weakening dollar. Liquidity also declined later in the year, decreasing investment demand and thereby pushing up prices further. Declining tensions amidst Iran and Syria also fueled the rally.

Other than serving as a perfect hedge against inflation, Gold has been a relatively risk free asset ensuring stable and consistent returns for its investors. Thus, in the wake of instable markets as well, the rise in demand for Gold as an investment tool has been on the rise.

Conjointly, there has been an upsurge of Jewelery demand from the markets of India, China and the Middle East. At the same time, an exodus of Exchange traded Funds have facilitated access to investment in Gold. These are primarily the demand side factors producing a pull effect on prices.

On the supply side, the push factor has been the unavailability of Gold to match the rise in Demand. The steadfast uptrend in the cost of gold mining and extraction, coupled with a shrinking global output of Gold mines, has exerted an upward pressure in the prices of Gold.

The previous high in Gold prices was achieved way back in 1980 when the Soviet Union invaded Afghanistan and the Iranian Revolution took place.

The price reached a high of 891.70 as reported by Bloomberg today. According to analyst's gold is expected to even trade higher with some predicting levels of 1000 for 2008. The short-medium term bet is that it will trade a lot higher and could be 900 by mid year and 1000 by end of the year!

Whatever be the year end figure, the resonating view is primarily the same. With the current economic and political state of affairs, this unprecedented Bull Run in the evergreen precious metal is unlikely to let up.

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Article by Chandni Kripalani | Subscribe via RSS | Join Club22 Free