LONDON (Commodity Online): If you go through a Financial Times report on gold, you will be busy putting all your money in gold basket by now.

According to the leading business paper, gold is heading for more records and the prices can any time breach the psychological barrier of $1,300 per ounce next week.

Gold was trading at $1,296.85 on Friday in London. Before this gold had already set five new records in this week itself. According to Financial Times, the reasons for the latest bull run in bullion are fears that renewed monetary easing by the Federal Reserve could lead to sharp falls in the US dollar and, eventually, a jump in inflation have sent the gold price to a string of record highs this week.

The hedge funds and commodity traders that snapped up gold earlier this year, betting on its traditional status as a store of value at times of turmoil and as a hedge against possible future inflation, are already sitting on healthy profits following a spectacular rally, the paper said.

That might be a signal to sell. But, even among those who believe the market is now in bubble territory, there is little conviction prices are about to fall.

Several bankers told the business paper that there was no chance of gold prices coming down in the near future.

The precious metal, already in a 10-year bull market, has been driven higher by a combination of factors.

One of the biggest influences on the price has been the behaviour of central banks. The Fed’s efforts to pump money into the economy to revive lending and growth have already raised fears of a surge in inflation later. That has made gold an attractive bet for some.

Moreover, after selling gold from their reserves at a rate equivalent to 10 per cent of annual demand for two decades, central banks have now turned buyers.

In the last two weeks, action by some central banks has also raised the prospect of a round of competitive devaluation of paper currencies, which has been supportive for gold.

First, the Bank of Japan last week intervened to weaken the yen for the first time in six years. Then the Fed on Tuesday signalled it was prepared to initiate a second round of quantitative easing. Its statement drove the dollar sharply lower.

Some of the most influential speculators in the gold market are hedge funds – many of which have been taking unusually large positions in the precious metal. Traders say the latest leg of the rally, which has lifted gold 12 per cent from below $1,160 in late July to its peak of $1,296.10 on Wednesday, has been driven more by hedge funds and other money managers than by small-scale retail investors.

The most prominent hedge fund in the gold market is Paulson & Co, which is renowned for correctly calling the collapse of the US subprime housing market. Paulson & Co denominates a third of its $33bn in assets in a special gold share class.

In fact, gold is the group’s largest single position. The $3.4bn stake in the SPDR Gold Trust, a listed US instrument backed by physical gold, equates to a greater tonnage of the metal than Australia holds.

Even funds that have historically shied away from the metal are now laying on positions designed to profit from a further rally.

For many hedge fund managers trading in gold can not only be profitable, but can help to lower the risk profile of their portfolios by diversifying them away from dollar currency risks.

For now, the physical market is providing further support. The supply of scrap gold, which usually rises when prices hit records, has remained surprisingly slow.

Analysts, therefore, believe there is plenty of scope for further short term gains in the gold price. Adjusted by inflation, current record prices are far below the levels touched in 1980, about $2,300 in today’s money.
(Source: Financial Times)

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