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gold likely to continue record run

  1. 2,333 Posts.
    http://www.abc.net.au/news/2011-07-18/gold-price-rise-likely/2799278?section=business

    The price of gold has been on a steady ascent for the past couple of years, and this morning it hit an all time high.

    The demand is coming in part from a wealthier India and China, but the new gold rush is also telling a broader story about the state of the world economy.

    The United States has until August 2 to get its house in order and raise the country's debt ceiling.

    According to Standard & Poor's, the alternative would likely result in some form of debt default.

    Last week also saw Moody's downgrade Portugal and Ireland's sovereign debt to 'junk' status.

    Another world away, and China is seeing unprecedented rates of economic growth.

    According to Westpac senior economist Justin Smirk these are close to ideal conditions for gold investors.

    "With a backdrop of China growing and being more of a growth, i.e. inflation, story that is positive for gold prices, and then you've got this bit of financial market risk and people looking for alternatives, and that helps gold as well," he said.

    He says it highlights the fact investors still have money to spend, but they are becoming more picky about where they put their cash.

    "It is actually outperforming other commodities right now, and that to me suggests that the world isn't really overly worried about the growth outlook right now, and is worried about more sort of financial risks and looking at gold as an alternative," he explained.

    Those financial risks are related to the stability of the US and European economies.

    Specifically, traders are now questioning the long term holding values of the US dollar and the euro.

    "Gold trades as a currency, so if you've got a situation where no one really wants to hold US dollars because of the deficit situation, their debt situation, and also because no one really wants to hold euros, they are not a very attractive currency, if you strip out Germany and France, the rest of Europe is doing quite poorly," said IG Markets institutional dealer Chris Weston.

    "People want to hold something that is tangible, something that actually holds its value and that product is gold."

    He does not see any immediate threat to the US dollar as the world's reserve currency, but he does see the precious metal taking up more US dollar space in bank vaults around the world.

    "I think what will probably be the most likely scenario is that we will see central banks increasing their reserves of gold. They are looking to diversify out of US assets and gold will be a key beneficiary of that," he added.

    The trouble is that gold by nature is precious, meaning it is hard to come by.

    That, for the time being, effectively prevents it from becoming a credible threat to the US dollar.

    "I've heard it described that all the gold ever mined and still in existence basically fills the SCG to a level of about three feet," he said.

    However, the US dollar is not out of the woods yet. Economists say if it continues to fall in value, its credibility could come under question.

    "We have been seeing a lot of central bank buying, particularly central banks in China, India and Russia over the last couple of weeks, and if we do continue to see uncertainty on the policy front relating to fiscal issues in the US and Europe going forward, that central bank buying should increase," said JP Morgan economist Helen Kevans.

    "That would only become a threat to long term weakness in the US dollar if it is sustained for an extended period."

    For the short term at least, she sees the price of gold continuing to climb.

    "I guess going forward with supply constraints and increase in demand, we could actually probably see gold head even higher over the next couple of weeks," she concluded.
 
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