Wednesday, December 29, 2010

Future bright for gold in 2011

Even as the New Year is set to dawn, investors are waiting to know which way the gold market will move as they are worried about the inflation and US’s policies to tackle economic slowdown.

According to analysts, inflation, currencies and interest rates in the world’s largest economies will have a huge impact on the bullion markets in 2011. 

Gold prices generally rise during times of actual or projected inflation because of gold’s traditional status as a safe haven asset. 

Gold buyers seeking an asset which reacts favorable to inflation or currency devaluation often move from the falling currency into gold. Currently, the Federal Reserve is more concerned with deflation than inflation and has shown little reluctance to flood the US economy with more dollars. In contrast, countries like China and India are seeing relatively strong economic growth and, with it, higher inflation. China’s prices are 5.1% higher than a year ago, while India is projecting inflation will be 5.5% by March 2011.

While more inflation can be favorable initially for gold prices, the countervailing economic policy of raising key interest rates to temper inflation can sometimes make interest bearing instruments more appealing to investors at the expense of gold. But, so far, rates have not been raised to levels high enough to impact gold prices, or in China’s case, they’re not been raised at all.

Historically January and February are good months for gold; in past years, buyers have bought back gold positions that they shed heading into the New Year.

Continuing inflation concerns could help support gold prices in 2011. The Reserve Bank of India said inflation is not slowing as quickly as it wants. The two pillars of gold are, in any country’s currency, are negative real interest rates and deficit spending. 

-Umesh Shanmugam

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