Gold is considered to be a great hedge against numerous types of risk including inflation, deflation, political risk or simply financial uncertainty. And in a time when governments are considering the highly precarious prospect of injecting liquidity into the financial market by simply printing more money, people are likely to invest in a commodity that they feel will hold its value.
Gold is unique in that it does not operate on traditional supply and demand fundamentals, with it being in over-supply for the past 20 years, and as long as interest rates remain low it will continue to outperform other commodities.
As with any investment there is a risk however. And personally I believe that that gold is certainly close to reaching its peak value. There has been speculation for a while that the IMF and central banks are going to be selling off their vast gold reserves and if this happens, it is sure to have a negative effect on prices. You can add this uncertainty to the fact that India, the largest consumer of gold in the world, is no longer buying the metal. Couple this with dwindling consumer jewellery sales and the outlook for gold does not look so rosy.
Tieing in with Knip looking at selling jewellery, a factor that is likely to have a negative impact on the price of gold is the sale of scrap gold in India and the Middle East. World scrap supply rose by 13% last year with record levels of recovery seen in Turkey and the United States. India, who is purchasing low levels of gold, has also begun recycling with a 6% scrap rate last year. It is important to note that 71% of gold demand comes from the Indian sub-continent, the Far East and the Middle East, where ongoing scrap sales represent a significant risk to the price of gold.
Presently the the rapid rise in investor demand is off-setting the negatives on the demand side, however it is plausible that gold could be heading for a significant drop in price.
History has shown that gold is certainly a shrewd investment in times of recession, however as we start to climb out of the trough, new investors should be aware that buying gold is not the safe bet that it was a year ago.
As for another crash sending the prices soaring even higher, i'd have to bet against it. I'd imagine that we're going to still see some fluctuations, but no drop like we saw after the Lehman collapse this time last year.