Gold hits fresh record on inflation fears

The Business of Mining - thebusinessofmining.com | May 14, 2010 | 10:47 am Precious Metals Gold 

“… in the commodities market, gold and silver prices soared on strong investors demand.
The rally has been supported by a rush of demand for coins and small bars from European investors, particularly in Germany, where there are fears of inflaion in the wake of the €750bn eurozone bail-out agreed on Sunday night.
Spot gold hit a fresh all-time high of $1,224.70 a troy ounce, up 1 per cent on the day. Silver jumped 1.8 per cent to $19.61 an ounce, its highest since March 2008.”

Source: Financial Times, May 13 2010

Observations:

  • Some Southern-European countries are on the verge of defaulting on government loans. As the promised bail-out packages might lead to printing more money and higher inflation, investors are temporaliy moving their money into gold.
  • The strong inverse relationship between trust in European economy and gold price is demonstrated by the fall of gold price directly after the announcement of the bail-out.

Implications:

  • Western countries (not only in Europe) are structurally spending more than they receive, increasing the government debt. The bail-out of banks and the stimulus packages have accelerated this issue. This structural overspending will eventually lead to countries defaulting on their loans.
  • As some Southern-European countries are currently in clear troubles repaying their debt, investors are moving their money from government loans into safer places, like gold. This increases short term demand for gold and lifts prices.
  • Although the demand for gold will decrease again once countries regain the investor’s trust, the overspending problem will be recurring in the next decade. Gold will stay an interesting short term alternative, leading to a higher base level of the gold price and more price peaks like we are experiencing now.

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