A perfect storm for gold

With continued crisis in the eurozone, wrangling over the US debt ceiling and further currency debasements, the gold price is set to go even higher.

The yellow metal has soared to a new record above $1,600 an ounce. It has also made new highs in euros and pounds, exceeding €1,140 and £1,000 respectively. It's been "a perfect storm for gold", says FXPro.com. Europe's stress tests have failed to temper concerns over European banks, and the Fed has signalled that more money printing (QE3) is a possibility.

Investors have also fretted that US politicians wouldn't agree on raising the debt ceiling, causing a credit-rating downgrade and a potential global financial meltdown. Meanwhile, European leaders' inability to agree on a new rescue package for Greece has started to fuel fears of a collapse in the single currency. "If people seriously thought that there was a good chance that the euro would not survive, the associated flight to the safety of gold could easily see prices surge well above $2,000," says Capital Economics.

Yet even without a euro break-up, a US debt debacle, or QE3, there is plenty of scope for gold to keep rising. For one thing, the euro crisis is unlikely to be resolved soon, keeping investors jittery. And inflation-adjusted interest rates are negative across much of the world. This should bolster the relative appeal of gold, which, unlike many other assets, pays no interest.

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It should also continue to stoke fears of currency debasement through inflation, increasing demand for gold, traditionally the ultimate currency and store of value. Many economies struggling with high debts or slow growth are keen to see their currencies weaken. "Competitive currency devaluations and global currency debasement means that all fiat currencies are at risk of losing purchasing power," says a report by bullion dealers Glencore.

Central banks, especially those in emerging markets, seem worried enough to diversify their holdings. The World Gold Council notes that they bought more gold in the first half of 2011 than they did in the whole of 2010. New buyers in Asia, notably China, who are using it as an inflation hedge, are also propping up gold. Add to this the fact that we have yet to see the buying frenzy typical of the final stages of a long-term bull market, and a ten-year bull run is unlikely to be over just yet. Capital Economics sees gold reaching at least $2,000 by 2012. Two ETFs that track the price are Gold Bullion Securities (GBSS) and ETFS Physical Gold (PHGP). Only the latter is eligible for an Isa.