As any bullion analyst would tell you, gold is the single commodity that has had the longest Bull Run, and if recent turn of events are anything to go by, it definitely seems like that gold will continue it’s upwards journey. Today we will make an attempt to explain why gold prices have been moving northwards and why this journey is likely to continue unabated in the mid to long term horizon.
Buying Gold as a Hedge
The first reason why gold prices are rising is because the central banking authorities are purchasing gold at an increased rate. This is especially true of central banks in Asia and Latin America who are shoring up their gold reserves over the past two to three years. This is a trend that is likely to continue because these central banking authorities are unsure of what is fated for the currencies such as the dollar and the Euro given the recent turmoil in their respective economies.
Because of the financial crisis in the developed world, investors are looking at a safe haven to protect their wealth. This is the reason why gold exchange traded funds or ETFs have increased in popularity. Gold ETFs are an easy source of investment to protect their assets against any impending financial crisis. From 2011 to 2012 the inflow in gold exchange traded funds has nearly gone up by 60 odd percentage points.
China and India Stoking up Demand
The other drivers for the prices of gold are two countries that are often clubbed together by economists in the developing world. These are China and India. Both countries are known for their love of gold jewellery and despite the rise in prices of physical gold by about 25 per cent their demand for gold is on the rise.
Though India has been the largest buyer of gold for a long period of time, China has in recent times usurped the number one position as a buyer of gold. Not only is the Chinese central bank increasing its gold reserves it is also encouraging the retail investors to invest about 5 per cent of their income into gold investment. As a result, the Chinese middle class are going the whole hog in buying gold and retail jewellery chains have sprouted in recent times all across the nation to keep up with the growing demand for gold.
According to the latest data available from the World Gold Council, the global demand for gold has increased by 6 per cent in the first half of 2012, as compared to a year earlier. The global demand for gold is clearly surpassing the supply. The economic crisis in the developed world is far from over, the capital markets are in turmoil and acts of terror have nearly become an everyday occurrence the world over.
With dark clouds of uncertainty looming large over the biggest names in developed nations, the yellow metal is fast gaining importance as a symbol of protection. This is the major reason why gold is likely to rise and rise over the mid to long term time frame.