The rise of gold still has further to go

Gold has fallen below $1,700 an ounce, down from $1,800 last month and last autumn's record highs above $1,900. It has been under pressure lately because confidence in the American economy, and hence the dollar, has risen, while fears over Europe have subsided.

But the gold bull run that began a decade ago "remains intact", says Frank Holmes on Mineweb.co.za. As far as the euro crisis is concerned, the problem hasn't been solved, says George Magnus of UBS. It has merely been "put to rest for a time" by the European Central Bank's liquidity injections. The prospect of peripheral defaults threatening the financial system remains.

Beyond the temporarily receding fear factor, the liquidity backdrop is still encouraging, implying higher future inflation. Not only did the US Federal Reserve hint this week that it might print a third batch of money, but real interest rates are negative in much of the world and central banks continue to pour money into the system. "We are currently experiencing one of the greatest liquidity booms the world has ever seen," says Holmes.

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ISI Group notes that there have been 122 stimulative policy initiatives from central banks in the past seven months. Meanwhile, supply looks tight, with gold miners unable to boost supply significantly, as Morgan Stanley points out, and Asian demand is set to increase over the long term.

All this bodes well for further gains. And keep the big picture in mind, says Socit Gnrale's Dylan Grice. At present, Western governments are inflating their massive debts away. When they stop doing that and instead decide they'd better get to grips with the extremely painful process of spending and borrowing a great deal less, it'll be time to sell gold.