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Gold Prices: Is The Gold Standard Back?

The latest movements in gold prices vis-à-vis the US dollar and the purchase of IMF gold by India, followed by Sri Lanka and Mauritius suggest that the yellow metal seems to be making a comeback as a reserve standard. However, this is likely to be a temporary affair and once the global economy regains its balance, the lust for gold is likely to wane off.

Gold prices surged to US$ 1200 per ounce recently. Some of the reasons that have led to this surge in gold prices include uncertainty about the US dollar’s strength owing to the weakness in the US economy and the status of the dollar as a reserve currency in the wake of some nations replacing some of their dollar reserves with gold.

President Obama’s recent call to step up America’s war in Afghanistan also seems to have weakened the dollar and strengthened gold. Expected inflationary pressures due to quantitative easing in the US and the UK also seem to cast a shadow of doubt on the value of the dollar leading to gold becoming an investment hedge. The recent surge in gold prices has meant an 80% appreciation since its low price in October 2008 of $667 per ounce.

Rising gold prices have led to an appreciation in South Africa’s Rand as South Africa is a large producer of gold. The rapid rise in demand for gold is evident from South Africa’s precious metal exports including both gold and platinum, which surged by 40% this year. A rapid rise in the prices of gold has also led to individuals in places like India, Asia and Europe to cut back on their jewelry purchases in wake of high gold prices. High gold prices, in fact, have led individuals to sell their gold holdings. This gold seems to be making its way to refineries, which are working overtime to meet the demand of investors and speculators.

However, it appears that gold prices are experiencing an overshooting effect and given the dollar weakness, the prices may continue to rise for some more time leading to the formation of a bubble. During earlier such gold booms, high prices and the ensuing de-investment in gold by individuals has usually been followed by a deflation in gold prices. If this is to be taken as an indicator, the price point, which is likely to prick the gold bubble, may be around the corner. From latest developments around the world, it appears that gold buying is already slowing down. Though, gold prices have risen 80% since October of 2008, a slowdown in buying may prevent further rise in gold prices and the formation of a bubble. However, the slowdown is on part of consumers, which is due to the price of gold.

Further speculative buying and further buying by central banks could still jack up gold prices and lead to the formation of a bubble. If further bad economic news, especially from the US keeps pouring in, the dollar may come under a cloud and gold could then be sought after. Thus, as of now, the trend in gold prices seems to be linked to global economic performance and especially that of the US. All said and done, the lust for gold does not reflect the re-emergence of the gold standard, but is only being used as a temporary hedge in times of economic uncertainty. As the world regains economic stability, gold will lose its luster and prices would subdue automatically.

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