Investors looking for a safe haven are turning to gold.
The price of gold soared past $1,200 an ounce on Wednesday, taking its gains for the year to 41 per cent.
Experts say there are no signs the enthusiasm will end soon, citing the rise in gold prices as a reflection of external factors - such as inflationary fears - rather than of supply and demand fundamentals.
The bull run in gold prices follows a survey that was released earlier this week, which revealed that investors are becoming more inclined to put money into gold and gold ETFs.
Given a £50,000 windfall, gold and gold ETFs are the fifth most popular investment choice, but given a £5,000 windfall, investors rank the asset class third, according to the study by TD Waterhouse.
The survey reveals a general shift towards more stability, especially amid fears that the Bank of England’s quantitative easing program will spark inflation.
However, experts believe that gold prices will continue to rise, sustained by increasing investor appetite for an asset class that is often cited for its ability to perform well in times of economic uncertainty.
“We’ve been in a gold bull market for a number of years. It bottomed out in 2001 but has recently picked up. There are many reasons why gold is seen as a good investment and those reasons don’t seem to be going away,” said Richard Davis of BlackRock.
“This year we’ve seen reasonably steady net inflows into gold equities, which is a sign that the price will rise. Gold prices are also interestingly poised. If demand slackens off, then prices will fall. But if there’s further news that central banks will buy gold, this will also boost investor demand.”
India and Sri Lanka announced last month their intention to buy gold from the International Monetary Fund (IMF).
Suki Cooper, an economist at Barclays Capital, dismissed the notion that gold prices are over-inflated. She said demand for gold is coming from both investors and the official sector, a sign that demand will continue to rise in the long-term.
“In many respects gold has proved its worth within a portfolio at the end of last year when prices were falling across asset classes. Gold prices did not fall as sharply and it allowed some investors to take profit and meet margin calls. Gold became more relevant.”
The price of gold rose to its highest level since 1980 at the peak of the subprime crisis in 2007. Then in 2008 gold hit another record high on the back of rising oil prices coupled with a falling US dollar. However, even as the dollar strengthened, investors still remained loyal to the metal.
“Given the large above ground stocks of gold, the relationship between traditional supply and demand factors and gold prices weaken. Gold also plays a dual role as a commodity and a currency due to its monetary history, the drivers for gold also include external factors such as inflation, currencies , equity market performance and concerns about the economy.”
Five years ago, three quarters of gold demand came from jewellery, compared with 10 per cent from investors. Barclays Capital expects investor demand to jump to over 30 per cent at the end of this year.
Ms Cooper said gold prices will remain on an upward trend and then start to ease gradually towards the end of 2010, but not drop sharply.
However, Kully Samra of Charles Schwab cautioned against depending too heavily on gold as a hedge against inflationary fears.
“Everyone assumes gold is a hedge against inflation but in reality, stocks are the hedge against inflation.”
Angus Rigby, CEO of TD Waterhouse said the enthusiasm for gold is here to stay, especially in a low interest rate environment. ”Customers have few attractive alternatives. They don’t want to put money in a low interest savings account.”