Gold Rallies on the Back of Speculation

Economic instability has ever been a fertile ground for the appreciation of gold prices. One of the obvious reasons is the revamping of the investment basket by the investors on different levels. Economic turbulence has a strong bearing on most types of assets, including stocks and paper currency. During inflationary conditions, the paper currency begins losing its value relative to the goods and services, which makes them pricier. It is prudent, in such conditions, to substitute gold for at least a part of the total investments. This works as a hedge against the loss in the value of assets in hand. Interestingly, the same commodity is a hedge in the times of deflationary pressure on the economy. Deflation threatens erosion in the currency because of a lack of commercial activity.

In effect, the demand for gold shoots up in any type of volatile times on the economic scene. The demand-driven price rise acts as a positive indicator for speculators to pitch into the market. As nations are slowly propelling their growth engines after the recent global recession, the investors are whetting their risk appetites. However, speculating another impending crisis and consequent investment switch towards gold, the bargain hunters traded the yellow metal in large volumes on Monday, June 14, 2010. The disproportionately large sovereign debt in Greece became known earlier this year, followed by a bailout appeal by the Greek Government in April. The analyst opinions remain divided on the likelihood of a double dip, while the prospective bailout packages are being formulated and negotiated. The uncertainty in the Euro Zone has created widespread concerns among the investor funds, banking corporations, Governments, and the retail investors, alike. Consequently, gold is yet again being viewed as a safe haven for investment and hedging.

Euro has taken a beating with a loss of approximately 7% in value, in the month of May. Back home, the US national debt is over $13 trillion, forming a sizable percentage of the GDP. The impact is a weak US Dollar. For long, Euro and gold were seen as alternatives to Dollar. A sliding Euro has propelled the demand for gold even further. The entire demand is not coming from the speculators and the institutions, but they are fuelling a large part of it. The mixed sentiments towards the economic recovery were evident last week, when gold touched a record high of $1,251.20 before plunging to $1,214. Afshin Nabave of NKS Finance expects gold to cross $1,250 once again and approach $1,300 in the due course.