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Gold pendulum swings the price back over $1,100

30 March 2010

Gold prices have bandied about quite a bit in the last two months while maintaining a relatively modest range of less than $90. The high point for gold in the last 60 days was $1,139.60 per ounce at the start of March and the low point was $1,052.25 in early February.

The current gold spot rate is virtually in the middle of this two month range at $1,109.60 per ounce. The lack of firm direction in gold is symbolic of a speculative environment in which investors are trying to put their collective finger on whether to take on riskier growth investments, or to stick to safe money investments like gold.

Overall sentiment about the US economy is certainly more positive now than it was two months ago and it continues to get slightly better with each passing week. However, with the prospects of a long and drawn out recovery, interest in gold has not sharply reversed like it often has in the modern era of gold trade since the float against the dollar began.

In the big picture, gold currently sits around $100 below its all-time high in 2009 of $1,218.25. According to Blanchard Investment News and Research, there are six common factors that drive gold investment: Hedging against inflation, hedging against dollar declines, safe haven investing during tough times, supply and demand commodity buying, storing value, and portfolio diversification.

In the first decade of the new millennium, gold has delivered an annualized rate of return near 17 per cent. This is comparable to long-term rates of return highlighted in equities as a reason for investing in stocks for long-term growth. In 2000, gold was at a current 10 year low of $255.30 before its relentless upward push.

Looking over those six common factors that affect gold investing, hedging against inflation has certainly been a factor, especially in the months prior to the start of the recession. Hedging for dollar declines has been huge the last few years, but the dollar appears to be gaining footing now. Much of the push the last couple years can be credited to save money investing which is often a major prop for gold prices.

Buying of gold as a commodity is more generally related to common supply and demand elements. This has an ongoing impact on the gold price. Many countries rely on high amounts of gold reserves as value storage, with the US leading the way. Portfolio diversification is often a consideration, though gold has obviously taken on a more prominent role for some speculators in the last several years due to some of the other factors.

In determining the future direction of gold, it would appear a return to stable global financial conditions, a stronger dollar, and other factors might put a ceiling on gold prices for the near future. However, many banks and analysts, including goldmoney.com founder James Turk, have been calling for gold prices in the thousands simply as a long overdue adjustment for inflation. Decisions by the Fed and the direction of the economy coming out of the recession could have an effect on whether that comes to fruition.

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