Investment analysts believe gold will continue to climb as world leaders wrestle with growing uncertainty about Western markets in the US and Europe.
Gary Dugan, Emirates NBD's Chief Investment Officer, believes the world has entered what he calls the Golden Era of Gold.
"It isn't a golden week, a golden two or three years, it's a golden decade," Dugan said. "Fundamentally, there is short supply and there will be consistent demand."
Asked if gold will plummet in crash-like fashion in the near future, Dugan replied that this scenario is unlikely because world uncertainty continues to buoy gold demand as a hedge against the unforeseen.
"Last year, you might get a $100 move [in gold prices] … but a crash is very unlikely," he said, noting that an ageing population in the West coupled with a rebalancing of power from West to East will not revive the economic certainty markets enjoyed in the 1990s which kept gold prices low and currencies strong.
In a new Emirates NBD report, Dugan said: "Gold is your friend through periods of stress. We believe that the global imbalances will continue to generate financial stress in the global economy for some years to come, hence gold will remain very much in investors' minds.
"Global certainty and low volatility has been replaced with financial stress and high volatility. While the domination [by] eastern economies is a widely held view, no one is too sure how the baton of global leadership can seamlessly shift from West to East."
Walter De Wet, Head of Commodities Research at Standard Bank in London, agreed that uncertainty is bolstering demand, but noted there are other factors at work in pushing gold prices through the roof.
No return to gold standard
De Wet told Gulf News that "we believe the main driver is low real interest rates in major economies such as the US and China which is driving investment demand into real assets such as gold. On top of this we have an increased interest from especially EM [emerging markets] central banks to buy gold, although the amounts of gold these guys are buying are still small. Furthermore, with G10 currencies in general weak against all EM currencies and hard assets such as gold, more investment interest is added."
With EM countries such as China and India snapping up more gold to boost reserves, De Wet said he isn't buying some claims that there could be a revolt against the US dollar and a return to the gold standard.
"We are unlikely to go back onto the gold standard — it would restrict the ability of central banks too much to stimulate economies. In fact, going back to a full-fledged gold standard is likely to push the world economy back into recession," he said.
Investors, meanwhile, aren't rushing to buy gold as a commodity because it is rare.
"Above ground-stock for gold is very large compared to many other commodities. Therefore it is not so much scarcity but rather gold's ability to function as a global currency and its convertibility into any other currency which makes it so popular as an investment. On top of this you have a liquid trading market for gold."
De Wet downplayed forecasts that gold could well surpass the $2,000-per-ounce mark.
"It is possible, but we see it as unlikely. Gold investment demand may start to decline as soon as real interest rates start to rise in the US, China and elsewhere. This may well be towards the middle of 2012," he said.
Tony Due, Senior Private Banker with SG Hambros Bank Limited in the UK, said the degree to which gold prices swing is dependent on currency performance in coming months.
With US Federal Reserve Chairman Ben Bernanke earlier this month not ruling out a third wave of quantitative easing (QE), Due said a flood of more printed money could boost market confidence in gold once again.
With a QE3 entirely possible in the future, Due said $2,000 per ounce for gold might not seem that far off.
"This would imply a weaker dollar. If this occurs, it would mean a loss of confidence in the dollar. If QE3 occurs — which Mr Bernanke has been talking of — then we could see a loss of dollar confidence again, and therefore a rise in gold prices, with spikes up to $2,000 per ounce a possibility," Due told Gulf News.
With more currency injection by the US into markets possible, gold shores up more of its worth because its "supply growth is limited, you can't print it like a currency," he said.
