The precious metal is flirting with previous highs and trying to sustain above the $1,400 range once again, in an effort to break through to new highs. If gold can continue to hold above $1,400, it will likely find a strong support from where it can launch much higher.
During last year, gold rose some 30%, leaving investors wondering if there was any upside left in the metal. But this year has brought renewed vigour to the demand for gold as a hedge against global uncertainty.
Revolts in Tunisia and Egypt, uprising in Libya, protests in Bahrain, the deepening debt-crisis in the Euro Zone and tensions in the Middle East have all renewed the strength of gold as a safe haven. The precious metal hit record highs of Rs46,000 per tola in local markets.
The devastating 30-foot tsunami in Japan, the most powerful in 300 years, has also renewed global worries as Japan is already caught in a struggle for economic recovery.
Earlier this year, China overtook Japan to become the second largest economy, valued at $5.8 trillion compared to Japan’s $5.4 trillion. As these major transitions occur, gold provides a safe-harbour, at least until the situation becomes clearer.
Uncertainty in currencies and sovereign economies in general, has sent foreign investors and nationals rushing toward gold. It generally holds that a state with an uncertain future will usually see an exodus of investments, which in turn trigger currency devaluations, which in turn triggers a higher demand for gold. Historically, the US dollar has provided the same function of hedging. A large majority of Pakistani investors and for that matter Middle East/North Africa, hold portions of their savings in local or foreign US dollar accounts. In dire circumstances, the money stashed away can be utilised easily while providing a good hedge against uncertainty in the local economy and general social unrest.
However, as the US economy deals with its own problems, it continues to print trillions of dollars. As these dollars flood the markets, investors worry about the longer term prospects of the currency and have increasingly turned towards gold.
The writer is heading Online Strategy and Development at Express Media and can be contacted at [email protected]
Published in The Express Tribune, March 21st, 2011.
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