Gold price soars amid rising tension

By Steve Rothwell

Demand for gold has surged in China and India. Photo / AP
Demand for gold has surged in China and India. Photo / AP

Gold is having a revival.

The price of gold touched US$1420 an ounce last week, a three-and-a-half month high, as escalating tensions in the Middle East, volatile currency markets and renewed demand for jewellery in China and India pushed prices higher.

Gold has rebounded 15 per cent to US$1396 an ounce since sinking to US$1212, its lowest level in almost three years, in June.

Gold's resurgence follows a rough ride this year.

Gold slumped 4.8 per cent in the first three months of 2013 as the outlook for the economy improved.

For many years before that, large investors, like hedge funds, bought the metal as a way to protect their investments against rising prices and a slumping dollar. They feared that the Federal Reserve's stimulus programme could cause prices to rise. But inflation remained subdued. Also, signs in January that the dollar was strengthening diminished the appeal of owning gold.

Then in April, the bottom fell out.

A proposal that Cyprus sell some of its gold reserves to support its banks rattled traders, prompting concern that Spain, Italy and other weak European economies might also sell and flood the market.

Gold plunged by US$140 an ounce, or 9 per cent, as investors unloaded their holdings, the biggest one-day drop in more than 30 years.

While the price of gold is still down 17 per cent this year, the metal is on the rise.

When financial markets get jittery, investors often buy gold because it is considered one of the safest assets that can easily be converted to cash.

As the stock market soared this year, rising as much as 20 per cent, investors had less need to hold gold.

That has changed during the past four weeks.

The Standard & Poor's 500 index has lost 4 per cent since reaching a high of 1709.67 early last month. Traders are concerned about when and by how much the Fed will pare back on its stimulus.

Strife in Egypt and Syria has also reminded investors that it's a dangerous world out there - wars can spread and oil prices can spike, hurting economies and stock markets.

The Fed appears close to reducing its US$85 billion in monthly bond purchases, and that has stirred up currency prices worldwide, particularly in emerging markets. US interest rates have started to climb in anticipation of the Fed's reduced stimulus. Investors are selling their emerging-market holdings and converting the proceeds back into dollars.

The value of the Indian rupee against the dollar has plunged by more than 11 per cent in August on concerns that surging oil prices are pushing the country toward an economic crisis. The Indonesian rupiah has also slumped.

The World Gold Council, a trade group for gold mining companies, said last month that demand for gold surged 87 per cent in China in the second quarter, compared with the same period a year earlier. Demand in India climbed by 71 per cent.

Gold still remains far below its inflation-adjusted peak.

It rose as high as US$873 an ounce in January, 1980. Adjusted for price increases that would be worth US$2475 in 2013.AP

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