Bad news boosts the gold price

Market jitters have seen investors push the gold price higher.

The gold price has bounced by 5% this month, marking the second time in a year that the $1,200-an-ounce level has provided support, as the markets have suffered a scare over global growth prospects. The jitters spurred the biggest rush into US gold exchange-traded funds (ETFs) since July.

Falling real (after-inflation) interest rates, a result of falling bond yields, have also helped the higher real rates are, the less appealing gold is, because it offers no yield. Solid demand for gold bars and jewellery in Asia, notably in the run up to the Diwali festival in India, has also buoyed prices.

So what next? The US recovery remains on track, implying higher interest rates. But this could well be offset by interest rates remaining at near-zero levels for longer and more money printing elsewhere.

In addition to more monetary loosening in Japan and Europe, all the money printing done so far could still lead to a surge in inflation over the next few years.

Meanwhile, as emerging Asian consumers and investors get richer, their demand for gold should climb, while emerging-market central banks have also been increasing their gold purchases in recent years. So there is scope for further gains. Capital Economics sees gold reaching $1,300 next year and $1,400 in 2014.

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