Gold Builds for the Long Term

November 24, 2012 at 09:35


Gold prices rallied above $1,750 a troy ounce on Friday for the first time in more than five weeks, propelled higher by a weaker dollar and growing investor confidence in the precious metal.

On Friday alone, the metal gained 1.3 per cent to touch a peak of $1,752 as a fall in the dollar triggered a rally that pushed it through several closely watched technical levels, triggering automatic buying by some traders.

But bullion is also building a substantial longer-term following from investors, bankers say.

Although it has struggled to move higher after a surge in August and September on the back of the US Federal Reserve’s third round of quantitative easing, gold is still being bought in significant quantities by investors such as pension funds, sovereign wealth funds and individual savers on the back of concerns about the devaluation of major currencies.

Those concerns have been amplified by recent actions such as the Fed’s programme of QE, which some believe may be expanded in December, as well as other unconventional monetary easing policies by the European Central Bank, the Bank of Japan, and the Swiss National Bank.

The negotiations over the US fiscal cliff, which could push the world’s largest economy into recession by triggering a series of automatic tax increases and spending cuts, are also pushing investors towards gold, analysts say.

Indeed, the yellow metal received a boost this week from news that the central bank of Brazil bought the most gold in more than a decade in October.

According to monthly data released by the International Monetary Fund, the country raised its bullion holdings by 17.2 tonnes in October to 52.5 tonnes, the highest level since January 2001.

The move makes Brazil the latest emerging economy to buy gold, for much the same reasons as private investors are turning to the yellow metal.

The central bank said in its most recent report in June that it would seek “a greater diversification of international reserves”.

Other central bank gold buyers in recent years include Russia, Mexico, South Korea, Thailand, India and, most analysts believe, China. As a group, central banks are set to buy almost 500 tonnes of gold this year, the most in more than four decades.

After breaking through $1,750, gold investors will now be looking for the precious metal to test $1,800 an ounce, according to Joni Teves of UBS.
“The yellow metal seems on the verge of a break higher,” she said.

Gold has failed to break convincingly above $1,800 on three occasions in the past year, with each failure leading to a fresh sell-off.