(By Jason Simpkins) Gold prices soared to another fresh record yesterday (Wednesday), driven mainly by speculation that central banks would continue to ramp up purchases of the precious metal.
Gold futures jumped as high as $11.30, or 1%, to $1,096.20 an ounce in morning trading on the New York Mercantile Exchange (NYMEX). And most analysts believe gold prices are bound to shoot even higher.
"Everything is pointing to the price of gold going higher," Mike Sander, an investment adviser at Seattle-based Sander Capital Advisors, wrote in an e-mailed report.
And "a whopping budget deficit continuing to balloon, a Federal Reserve in no place of raising rates, and central banks all over the world diversifying away from the dollar," will be the main catalysts for gold's continued rise, he said.
The U.S. Federal Reserve's loose monetary policy has put the dollar under duress. The Fed has pumped more than $2 trillion into the U.S. economy since the financial crisis began more than two years ago. It has lowered its benchmark federal funds rate to near zero and stepped up purchases of U.S. Treasuries and mortgage-backed securities.
More recently, the return of investor risk appetite and the widespread belief that the Fed will have to keep its stimulus measures in place as the U.S. economy struggles out of a long and deep recession have put downward pressure on the greenback.
The dollar has tumbled by more than 17% against the euro since early March, and the Dollar Index – which measures the greenback against the euro and five other currencies – is down 6.4% this year.
With the dollar in freefall, central banks and hedge funds have sought shelter in hard assets, particularly gold.
Indeed, this week's record rally began Tuesday, when the International Monetary Fund (IMF) said it sold 200 metric tons of gold to the Reserve Bank of India (RBI) from Oct. 19 to Oct. 30.
The IMF said in September that it would sell 403.3 metric tons of the metal to shore up its finances and lend at reduced rates to low-income countries. That announcement led some analysts, who worried the market might be flooded, to turn bearish on gold. But now there's a question of whether or not there will be enough gold to go around – even with the IMF sale.
Investors around the world are betting that purchases such as this mark a new era for central banks around the world, one in which they will seek greater diversification from the U.S.
