The golden rally, again

Once again, people have reverted to the safe haven of investments - gold. And once again, the current unpredictability of the world economy is responsible for this gold rally. The popularity of this metal for investment owes to its ability to act as a hedge against inflation, which erodes the value of paper assets.
With the US Federal Reserve having pledged two years of near-zero interest rates, the rally in gold prices is not likely to show any signs of slowing. Gold crossed the $1800 per ounce mark last week, having almost tripled from its 2008 lows of $680 per ounce.
The hike in the price of gold is also linked to several causes including the increase in demand for gold by countries like China and India for stocking up their foreign reserves.
In addition, a stressed global economy, in particular the US economy, mean international investors look up to gold as a safe investment.
Intraday volatility across financial markets has spiked over the past few weeks, with rumors flying about the health of European banks, questions mounting about the stability of funding markets and authorities struggling to solve a crisis of confidence in Europe.
These factors have added to the rise in the gold price globally. The metal was up 5.9 percent last week, on course for the biggest weekly gain since February 2009, with expectations of a continuation of the upward trend in prices over the coming months.
Worldwide, recycled gold meets approximately 40 percent of demand. But the latest rise in gold prices has failed to attract people to sell their existing jewels. According to Philip Klapwijk, executive chairman of GFMS Ltd - a metals analytics firm which is also a unit of Reuters - recycled gold is expected to grow by only about five percent this year. This is likely to raise gold prices even further in the coming months.
The implications of soaring gold prices in world market are also influencing local gold markets, with prices soaring domestically as well, with local investors capitalising on the situation by physical purchase of the bullion.
Ironically, despite the safe appeal of the metal, it adversely affects the growth rate of the economy because as cash is converted to gold, money "goes out" of the economy causing a slowdown of the transaction velocity.
Further, despite the apparent luster of gold, and despite the drop in equity prices in the past few weeks, some fund managers in Asia with long-term horizons have been slowly shifting their portfolios by buying more cyclical stocks - stocks that are more sensitive to changes in business cycles - and reducing exposure to so-called defensive sectors such as gold.
The eventual trend in the prices depends largely on the American economy and the pace with which it can make progress, as well as the overall health of the eurozone and the global economy in general.