The daily increase in gold prices came to a halt last month. For more than a year, the price has been skyrocketing, knowing only one direction — up. On April 2010 the market price per ounce of gold was slightly over 1.100 dollars and on September 5th 2011, it reached 1.900 dollars per ounce.
Gold had an astonishing 70 percent revaluation in less than a year and a half, while most of the financial market was crumbling. The main reason for this price increase was three-fold. Firstly, it points to the Libyan conflict and the aftermath in the Middle East which includes the main oil supplying countries.
Analysts were not expecting these revolutions all around the region and therefore it was harder for them to understand the consequences. Could the revolution spread to more countries? Could the oil supply be endangered? Oil shortage lead to higher prices and from there to higher inflation rates. That is why some people prefer to invest money in assets rather than currencies.
Secondly was the instability of stock markets in both bonds and shares. Greece´s default crisis, the problems with peripheral countries in the European Union, and the sinking of the biggest share markets prompted investors to take the money out of these markets and invest in other assets with less volatility.
Third source of impact came from the weakening of the dollar. As gold is an asset exchanged within markets where the dollar is the main currency of reference, the weakening meant a higher cash per gold ratio and therefore a hit on the price. Since gold reached its peak on September 5, the market has sunk, dragging the price down along with it.
It is now 15 percent lower than the peak, slightly over 1.600 dollars per ounce. Once again there were three reasons; the dollar strengthening, a sale increase by people seeking to obtain cash to cover losses from other assets and the volatility of other markets has finally reached gold.
Still many analysts forecast a better future for gold, stating that this is only a temporary relapse. For instance Paul Blaxham, HSBC chief economist for Australia and New Zealand, stated a few days ago: “Our forecast for gold next year is 2.025 dollars per ounce… but it is difficult to ascertain where to set the lower limit now, because many tendencies currently happening are responses to political decisions.”
This opinion is backed by Ong Yi Ling, an analyst from Phillip Futures who believes: “in the long run, after the prices will have stabilized and they will get back to normal life, refuge values will come back slowly to lower prices. In 2012, still it is possible that gold reaches 2.000 dollars per ounce.”
So the fairytale story that gold is a secure value should be abandoned. It is a refuge value only for times of crisis, but it is not invulnerable in the greater and more permanent run. As all assets have their risks and benefits, it should never been considered a stronghold. Investors can be fortunate at times, but if they had invested last week, they would have withdrawn an investment with gross losses. Nobody is safe in these uncertain times.