'SAFE' ASSETS:GOLD AND the Swiss franc once again hit record levels yesterday as investors poured money into an ever-narrowing range of "safe" assets.
The precious metal soared more than 3.5 per cent to hit a record nominal high of $1,780 a troy ounce, while the Swiss franc benefited as the dollar slumped in the aftermath of the US Federal Reserve’s decision to keep rates at historic lows for the next two years.
The dollar fell 6 per cent in the immediate aftermath of the Fed decision to an all-time low of SFr0.70676 and was last at 0.71400, down 5.5 per cent. The US currency has lost more than 23 per cent of its value against the franc so far this year and there seems to be no let-up in selling.
Gold is similarly proving its allure. Investors ranging from sophisticated hedge funds to European savers were turning to bullion as they pulled money out of tumbling equity markets.
Investors bought 950,000 ounces of gold through exchange-traded funds on Monday, the largest inflow since February 2009, according to UBS precious metals strategist Edel Tully.
Dealers said sales of coins and small bars to European investors were on Monday the highest so far this year. “Everything the gold bulls predicted is coming true,” said Matthew Turner, precious metals strategist at Mitsubishi.
“The euro zone is under severe stress, government debt from Greece to the US is being called into question and most central banks see the solution as expanding the money supply.”
Bullion has risen 20 per cent since the start of July and 6.8 per cent in the last two days alone.
Adjusted for inflation, however, gold’s record remains well below its 1980 peak, which translates to almost $2,500 in today’s money.
Analysts have revised up their forecasts in the wake of the US downgrade. Goldman Sachs said gold would rise to $1,860 in 12 months, while JPMorgan predicted it could reach $2,500 by the end of this year.
“Before the downgrade, our view was that cash gold could average $1,800 per ounce by year end,” said Colin Fenton of JPMorgan. “This view will likely now prove to be too conservative: spot gold could drive to $2,500 per ounce or higher, albeit on very high volatility.”
Investors have been betting on further sharp rises in the gold price over the coming months with traders reporting strong interest in call options – which give investors the right but not the obligation to buy a futures contract at a designated price – at $1,800 for October and $2,000 for December.
Some gold bulls are starting to draw comparisons with the 1970s when a similar confluence of bullish factors drove the gold price to $850 an ounce, a record which, adjusted for inflation, still stands.
“The level of anxiety and the lack of confidence in institutions, private or governmental, is similar to previous periods of elevated risk – and that is when gold shines,” said James Steel of HSBC. – (Copyright The Financial Times Limited 2011)
