Behind gold prices

Although the precious metal has always remained a prized commodity, prices of gold have rocketed to record levels in recent times. This surge in demand for the shiny metal has sent economists and analysts scampering to reassess the factors behind its persevering demand and the forces that drive its prices in the short as well as long term. The long-term strength in gold prices is expected to come on the back of the stockpiling of the metal by emerging economies such as India and China. In the short run, events such as the eurozone crisis have driven investors towards the perceived safe haven. This relationship between gold with the eurozone debt crises holds strength when seen in the light of the recent trend of gold prices and the progress of EU in resolving the crises. Over the past few weeks, as leaders from the region inched closer to an agreement aimed at addressing the current financial crunch, gold prices also tiptoed downwards. On the flipside, every news report of stalling progress of EU members translated into strength in the price of the precious metal. The world experienced this relationship when gold prices fell on the announcement of a plan to tackle the Greek debt crisis, but shot back up as scepticism over the effectiveness of this plan flooded the airwaves. In fact, gold prices have held firm as economists opine that there is no quick fix to the financial crises of the advanced economies. This sentiment is clearly reflected by the trend of gold prices, which had a bumpy start on October 27, 2011, soon after the announcement of the Greek debt bailout plan as people started liquidating long positions in gold which they had bought as a hedge against a plausible worsening of the debt crisis. Economists believe that even if the plan to fight the Greek debt crisis fails, gold prices would not fall by a large amount as the bigger player behind the surge in gold prices has been the US Federal Reserve and its quantitative easing policy. These quantitative easing plans are aimed at bringing in more liquidity to financial markets, in turn bolstering confidence and stability. As the Federal Reserve and the European central banks pile up more gold, prices of the precious metal continue to receive support. Economists are trying to understand the dynamics of gold prices which still have many unexplored sides, but one thing is for sure if leading economies continue to pile up gold reserves and uncertainty about the stability of economies in the eurozone persists, then gold would continue its upward march.