With the threat of a renewed global recession on the horizon, investors will continue to search for investments that will help weather this economic storm. One of the instruments investors still look at as a safe haven is gold. This could be why gold has managed to hold on some of its gains, despite being in a down trend since early March.
In these current market conditions, gold is more than just another commodity to be traded on the open market. One could say it is also a world currency. This aspect of gold was mostly forgotten before the global recession.
Before the economic turmoil central banks around the globe were net sellers of their own gold reserves. However, in the last three years central banks around the globe have transformed into net buyers of the precious metal, which is helping to support prices in the medium term.
According to some analysts every time gold prices have fallen, central banks have jumped to add to their reserves. In the last few months, gold futures have managed to hold strong support above $1,500. The price pattern has been creating a triangle pattern, which is fairly common after a strong price rally. Investors have been waiting for a definitive break above $1,642, which might confirm the renewed rally.
According the World Gold Council, which tracks trends gold trends, between March 2011 and March 2012, central banks increased their gold reserves by 400 metric tonnes, which was up from the previous year’s increase of 156 metric tonnes.
The reality is that governments around the world have been pumping liquidity in markets to try to boost confidence and jumpstart their economies. Unfortunately this liquidity, which has been come to known as quantitative easing, is causing a mass devaluation in currencies around the globe.
The U.S. has been one of the worst offenders. The only reason the U.S. dollar has managed to hold on to most of its gains is because investors, possibly wrongly, believe that the world’s largest economy is not as fragile as developing nations.
Investors are now starting to realize that the U.S. is not immune to another recession if the European economy collapses or China’s economy continues hits a hard bottom. In this environment, analysts expect gold could continue to perform well as uncertainty continues to grow.
“This global mountain of debt is going to continue to expand because to a politician or a banker, the answer to a debt crisis is always more debt. So far, all the bail-out programs as well as the huge quantitative easing programs of the US Fed, the ECB, BoE and BoJ have saved numerous financial institutions from total collapse, but have done nothing to stimulate the deteriorating economies in the Euro zone,” David Levenstein, President of Lakeshore Trading, wrote in a recent research note. “Investors are therefore urged to seek alternatives to paper currency to store their wealth for the future. And, in such a challenging investment environment, they would do well to accumulate physical gold and silver.”