Winnipeg Free Press - PRINT EDITION

Investors back in gold rush

Precious metal's price on rise again after plunge in June

  • Print

Gold is having a summer revival.

The price of gold touched $1,420 an ounce this week, a three-and-a-half-month high, as escalating tensions in the Middle East, volatile currency markets and renewed demand for jewelry in China and India pushed prices higher.

Gold has surged 15 per cent since sinking to $1,212 an ounce, its lowest level in almost three years, on June 27. A gain of 20 per cent or more would put the metal back in a bull market.

Gold's resurgence follows a rough ride this year. It slumped 4.8 per cent in the first three months of 2013 as the outlook for the economy improved while inflation remained subdued.

For many years before that, large investors such as hedge funds bought the metal as a way to protect their investments against rising prices and a slumping dollar. They feared the Federal Reserve's stimulus program could cause prices to rise. But inflation remained subdued and that reduced the need to buy gold. Also, signs in January that the dollar was strengthening diminished the appeal of owning gold.

Then in April, the bottom fell out. A proposal that Cyprus sell some of its gold reserves to support its banks rattled traders, prompting concern that Spain, Italy and other weak European economies might also sell and flood the market.

Gold plunged by $140 an ounce, or nine per cent, on April 15 as investors unloaded their holdings. That was the biggest one-day decline in more than 30 years.

While the price of gold is still down 17 per cent this year, the metal is on the rise. It closed at $1,396.20 an ounce on Friday, down $16.70.

Here are the factors driving its comeback:

A little insurance

One of the reasons people buy gold is it offers an alternative to more traditional financial assets, says Mike McGlone, director of research at ETF Securities, a provider of commodity-based exchange-traded funds. When financial markets get jittery, investors often buy gold because it is considered one of the safest assets that can easily be converted to cash.

As the stock market soared this year, rising as much as 20 per cent, investors had less need to hold gold.

That has changed the last four weeks. The Standard & Poor's 500 index has lost four per cent since reaching an all-time high of 1,709.67 on Aug. 2. Traders are concerned about when and by how much the Fed will pare back its stimulus, a major driver behind the market's rally.

Strife in Egypt and Syria has also reminded investors it's a dangerous world out there: Wars can spread and oil prices can spike, hurting economies and stock markets.

Investors want to add back a little insurance to their portfolios these days. "If we lived in a perfect world, we would not need gold," says McGlone. "But since we don't, we do need something that is the ultimate store of value."

Investors don't need to buy gold bars or coins to invest in the metal.

Exchange-traded funds are investments that are similar to mutual funds. Both can be bought and sold on exchanges. Some of these funds, such as ETF's Physical Swiss Gold Shares and SPDR's Gold Shares, allow investors to buy into trusts that invest directly in gold.

Haven from stormy currencies

The Fed appears close to reducing its $85 billion in monthly bond purchases, and that has stirred up currency prices worldwide, particularly in emerging markets. Investors had previously borrowed in dollars at low rates, then invested in faster-growing economies in Asia and Latin America.

Now that trend is reversing. U.S. interest rates have started to climb in anticipation of the Fed's reduced stimulus. Investors are selling their emerging-market holdings and going back into dollars.

The value of the Indian rupee against the dollar has plunged more than 11 per cent in August on concerns that surging oil prices are pushing the country toward an economic crisis. The Indonesian rupiah has also slumped.

When currency markets become volatile, investors worldwide look to invest in safe assets that will hold their value, says Dan Heckman, a national investment consultant who specializes in commodities at US Bank Wealth Management.

"Gold does fit that role," he says.

Jewelry buyers

Speculators such as hedge funds were behind the surge in gold over the last decade. That sent gold to a peak of $1,900 an ounce in September 2011. It also priced out a large part of the market -- jewelry buyers in countries such as India and China. In those countries, people have traditionally bought jewelry as a way to invest in gold. When prices slumped this spring, though, those buyers jumped back in because people in those countries bought more gold.

The World Gold Council, a trade group for gold-mining companies, says in an Aug. 15 report consumer demand for gold surged 87 per cent in China in the second quarter compared with the same period a year earlier. Demand in India climbed 71 per cent.

Gold still remains far below its inflation-adjusted peak. It rose as high as $873 an ounce on Jan. 21, 1980. Adjusted for price increases that would be worth $2,475 in 2013.

-- The Associated Press

Republished from the Winnipeg Free Press print edition August 31, 2013 B19

Fact Check

Fact Check

Have you found an error, or know of something we’ve missed in one of our stories?
Please use the form below and let us know.

* Required
  • Please post the headline of the story or the title of the video with the error.

  • Please post exactly what was wrong with the story.

  • Please indicate your source for the correct information.

  • Yes

    No

  • This will only be used to contact you if we have a question about your submission, it will not be used to identify you or be published.

  • Cancel

Having problems with the form?

Contact Us Directly
  • Print

You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

Have Your Say

New to commenting? Check out our Frequently Asked Questions.

Have Your Say

Comments are open to Winnipeg Free Press print or e-edition subscribers only. why?

Have Your Say

Comments are open to Winnipeg Free Press Subscribers only. why?

The Winnipeg Free Press does not necessarily endorse any of the views posted. By submitting your comment, you agree to our Terms and Conditions. These terms were revised effective April 16, 2010.

letters

Make text: Larger | Smaller

LATEST VIDEO

Bowman talks "job number one" in News Café interview

View more like this

Photo Store Gallery

  • An American White Pelican takes flight from the banks of the Red River in Lockport, MB. A group of pelicans is referred to as a ‘pod’ and the American White Pelican is the only pelican species to have a horn on its bill. May 16, 2012. SARAH O. SWENSON / WINNIPEG FREE PRESS
  • A golfer looks for his ball in a water trap at John Blumberg Golf Course Friday afternoon as geese and goslings run for safety- See Joe Bryksa’s 30 day goose challenge- Day 24– June 15, 2012   (JOE BRYKSA / WINNIPEG FREE PRESS)

View More Gallery Photos

Poll

Has the attack on Parliament hill shaken your faith in Canada's ability to protect its citizens from terrorist threats?

View Results

View Related Story

Ads by Google