Gold may be at its lowest point for 2008 and other metals may be on the way down too but what were the five key influences on their meteoric price rise?
Over the past five years the price of precious metals has more than doubled. The surge has been attributed to a combination of the following:
Depreciation of the US dollar. The World Gold Council provides evidence supporting the view of an inverse relationship between the price of gold and the US dollar. Over the past five years, from 28 February 2003 to 29 February 2008, the US Dollar Index fell 26.1% while the price of precious metals soared.
Inflation. Rising oil prices increase inflationary pressures. During periods of rising inflation, the price of precious metals trends upward. Studies conducted by the World Gold Council support the view that gold is a long-term hedge against inflation.
An increase in global wealth. The rise in global income, particularly from emerging market economies such as China and India, has contributed to increased demand for precious metals for manufacturing and jewellery.
Exchange Traded Funds (ETFs). The introduction of ETFs stimulated demand for precious metals. ETFs initially began as a bundle of equities tracking the performance of indices and were traded on a stock exchange in the form of shares. By 2004, ETFs moved into the precious metal sector and by early 2007 nearly 22 million ounces of gold were held in ETF accounts. By 2006, 18% of the world’s investment demand for physical gold came through ETFs.
Geopolitical tensions and uncertainty. Global political tensions generally trigger a short-term speculative rise in the value of precious metals. A good example is the 1979 Iranian Revolution. In the run up to the crisis, the price of gold rallied from $226 in December 1978 to $512 in December 1979, a 126.5% rise in one year. During the same period, silver surged 267.6%, from $5.93 to $21.79. The recent uncertainty generated from the credit crunch and the deterioration in the housing market has instilled fear and contributed to a similar surge.
The price of gold is currently on the way back down. However if you are looking at spread betting on gold or any other metal it is interesting to note the recent comment from Anthony Grech, Analyst, IG Index, “despite gold receiving most of the media attention, it has not been the best performing precious metal over the past five years. Platinum and palladium outperformed the precious metals sector over the past year. During this period, platinum and palladium surged 72.6% and 60.9%, respectively while gold rose 45.5%. A five year view, from February 2003 to 29 February 2008, reveals that Silver was by far the best performing precious metal, up 330.8%. Platinum placed second with a 215.7% rise, followed by gold’s 178.4% increase”.
The above comments do not constitute investment advice and neither IG Index nor Clean Financial accept any responsibility for any use that may be made of them.
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Risk Warning: Financial Spread Trading and CFDs carry a high level of risk to your capital. You may lose more than your initial investment. They may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
Article provided / approved by IG Index which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 114059.
'Precious Metals Spread Trading Trends' edited by SD, updated 12-Sep-08
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