“I’ll stick with you baby for a thousand years /
Nothing’s gonna touch you in these golden years”
- David Bowie
Is the current rally of gold and other precious metals an indication of coming global inflation, or are weary investors simply opting for a conservative and prudent investing strategy in an unsure market by investing in precious metals?
Gold prices rocketed over $1000 USD/ounce for the first time ever on Thursday March, 13, a more than 37% increase since the Federal Reserve cut interest rates on September 18th, in response to the fall-out from the sub-prime mortgage crisis, which saw banks experiencing well over $181 billion in writedowns and credit losses.
Analyst James Steel of New York’s HSBC Securities sees a direct correlation between the two: “At the heart of the gold rally is a credit crisis,” and “until the credit markets stabilize, gold is likely to continue to be well bid.”
And Bernard Sin of Switzerland’s precious-metal refiner MKS tends to agree, saying that there’s “real fear of inflation, … people are trying to hedge against it by buying gold,” reiterating comments he made on February 21st of this year that most people “buy gold for the inflation hedge.”
It’s too early right now to engage in arm-chair speculation about global financial disaster, but there are some things to keep in mind…
Although there may be a there may be some short-term corrections on the price of Gold (as Walter De Wet of Standard Bank and others are maintaining), Fortis & VM Group’s prediction that gold will rise to $1,100 per ounce within the next month should come true, partly as a response to ongoing electrical system problems in South Africa (the 2nd largest producer of gold, after China) impacting production as well as market demand and speculation about another round of rate cuts by the Federal Reserve, and the bullish onslaught can’t last. MKS Finance’s Sin predicts a 10% drop in gold’s value in the 2nd quarter, as the market stabilizes.
JM Cotze is a financial analyst and parachuting instructor living in Van Nuyes, California.
