October 08, 2009

A hat-trick for Gold

Gold prices reached a new all-time high of $1,061.50 achieving a hat-trick of three consecutive new all-time records this week. At the same time, the US Dollar took a beating depreciating against all major currencies.  New Zealand Dollar and Australian Dollar reached new highs for the year.  The Australian Central Bank raised interest rates by 0.25% on Tuesday, the first Central Bank of the G20 nations to do so.  This may be an important signal and invariably, some other Central Banks will follow suit. 

Is this the signal for a turn-around? 

With commodity prices, particularly metals, at increasingly higher levels, inflation fears may have sparked concerns among the Central Bankers down under.  Can Gold maintain its current trajectory and reach levels of $1500 and above as some analysts predicted? Or will we see some profit taking of the smart players now while the herd may jump in too late?  As a reference point, compare Gold with Copper.  Even more volatile than its more precious cousin, Copper has nearly doubled in prices since the beginning of the year.  It remains to be seen whether commodity prices will reach higher levels yet but volatility in these markets is unlikely to disappear anytime soon.  As for Gold, anytime a tradable asset reaches a new high or a new low the crowd mentality kicks in sparking yet more demand or supply for a perhaps already over- or undervalued asset.  This can drive price-trends in the same direction for a while longer.  However, one needs to step back and carefully consider if the rationale for buying the asset still holds true at higher prices.

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