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A confluence of factors is driving up gold prices to record highs with global inflation and weaker dollar the prime reasons. However, robust jewellery demand in the Asian region and Akshaya Tritiya on May 6 consi..

01 May 2011
By Rakesh Neelakandan
Gold is up by 7.6% for the year till date and for the year of 2010, gold ended higher by 30% that saw a decade of gold rally (on an annual basis) culminating in another one. Let us see the eight factors driving up the gold prices:

1. Near-zero interest rates in US

On last Wednesday when Federal Reserve decided to keep the interest rates in a range of zero to 0.25%, gold prices rose higher. The said interest rate range has been maintained since December 2008.

As long as the US keeps interest rates low, the demand for gold would be robust and so would be its prices, analysts say.

2. Weak dollar

Weak dollar gives buyers the necessary appetite for gold. On last Friday, the Comex Gold jumped $25.2 or 1.7%, to touch $1556.4 on weak dollar. This was the fifth consecutive monthly decline of dollar. Analysts expect the slump to continue in the future. Gold prices always go opposite to the US dollar vectors.

3. Global inflation

It would be a cliché to tell that commodity prices are rising around the globe. And whenever inflation has risen, people have rushed to secure gold as a hedge. Metals consultancy GFMS predicts that gold prices will jump past $1,600 this year, driven primarily by fears of high inflation.

4. Weak Europen recovery

The debt crisis in Europe is worrying and may spread to US and Japan, accoridng to GFMS Ltd  the situation would perk up the demand for gold further and hence prices could go further up.

5. Central bank buying

The central banks have been on a gold buying spree since 2010. They became net buyers of gold last year, for the first time in two decades and added 87 metric tons in official sector purchases by countries including Sri Lanka, Mauritius and Bolivia.

Russia alone purchased 8 tons of gold in the first quarter. This shopping frenzy has reportedly added to the price of gold.

6. Asian demand

India and China are bitten by yellow fever. In 2011, the yellow metal exhibited a robust demand in India. The trend is continuing as per the World Gold Council report.

In China, the peak season for gold arrives in the first quarter along with New Year and Chinese New Year holidays. This resulted in consumers purchasing gold to give away as gifts; particularly in the cities.

In Vietnam, jewellery demand got a fillip in Q1 2011, climbing by more than 5 tons relative to the previous quarter– the Gold Investment digest by World Gold Council said.

All these factors add to the prices.

7. Chinese rate hike

China has hiked interest rates several times this year to tame domestic inflation. Naturally, the rally in base metals subsided and what used to go to copper and other base metals flowed to precious metals like gold and silver.

8. Favourable Weather

In India normal monsoons have always bode well for farmers. And most of the farmers living in India turn to gold for investment after a robust harvest, since most of them do not possess a bank account.

This time around, normal monsoons have been predicted and gold prices are slated to go up when other factors are considered: Akshaya Tritiya, marriage season etc.

(The author is a Content Editor at Commodity Online and may be contacted at rakesh@commodityonline.com)

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Fred Saunders
11 Nov 2011
What about the fact that if we do endure a 2012 holocaust, the only currency worth anything thereafter is "wait for it"... You guessed it...Precious Metals! GOLD,SILVER,GOLD,SILVER...
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01 May 2011
Some of these ideas hit home but there are other stronger ones such as world demand on commodities or precious metals used in electronics which need to keep pace with mobile device demand. A larger balanced world economy India, China, Japan, EU, US, with each having their unique needs and interest. bankalchemist.
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