Over the past year, gold prices have shown an upward tendency but still there is no sign of relief in the markets. Recent debt crisis in Europe and the troublesome turn of events in the United States has again brought the attention of global investment community back to gold.

According to the Wall Street Journal, gold prices have rallied 25 percent this year as the risk appetite of investors has declined in the so-called safe havens of investment like treasuries and dollar.

The global economic environment is very uncertain with mounting debt debacles in the Euro zone leading to stringent austerity measure that eventually led to the weakening of Greek, Portuguese, and Irish economies. According to Mitsui Precious Metals analyst, when a metal has four to five distinct reasons to grow in value it would be foolish to not be bullish on it.

In recent weeks, gold has jumped nearly 8 percent, biggest rally since November 2008, for three days. Yellow metal gained $132.50 or 2.4 percent after downgrading of US credit rating by S & P from AAA to AA+.

Gold prices continued to boost when the Federal Reserve promised that it will keep the interest rates near zero till 2013, in a bid to keep the cost of borrowing low. and would consider further steps to help growth.

The drastic drop in Dow Jones Industrial Average of 400 points on Wednesday and over fear of slippery European economies extended the rally in market that moved the gold prices to hit a record high of $1801 a troy ounce beating Tuesday’s mark to take all time record.

Investors are avoiding anything that poses the slightest degree of risk, the sovereign debt crisis that engulfed US and few economies of the Euro zone have intensified their hunt for more secure and stable vehicle for investment.

Paul Christopher, international market strategist at Wells Fargo, said the appetite for gold is getting out of hand for retail investors. As equities tumble and debt woes mount record breaking rally of gold sparked after the US reached last minute deal to raise its debt ceiling and later S&P’s downgrade of US debt shattered the confidence in US treasuries.

Gold has been considered a store of value or an investment vehicle that can be relied on in times of inflation or deflation; in both cases when the value of money, in terms of purchasing power, is shaken.

The sporadic rise in demand for gold in recent days comes by the fear in the markets about faltering economic recovery and rising unemployment, infused the high degree of sense of security for investment in gold.

Gold and US treasuries were seen as the most secure form of investment in the world, and even many central banks are net purchaser of U.S. treasuries for a long time, but historically low interest rates, weak US dollar and infusion of trillions of dollars in the system in U.S. has generated fears of inflation thereby causing a major shift in investors sentiment with respect to U.S. treasuries.

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About the author

Muhammed Faraaz
Post-graduate in Economics from India, unfolding complexities and policies. Proponent of Classical Economics.

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