Gold is quickly approaching its 52 week high of $1,011/oz after finishing up more than $19 at the end of trading on Thursday. The yellow metal, which is traditionally an inflation hedge and a safe store of value in difficult times, has gained close to $50 an ounce this week alone and is threatening to break through the psychologically important $1,000 mark, giving a nice boost to the two most widely held gold ETFs, GLD and IAU (for a more in-depth look at Gold ETFs check out our Definitive Gold ETF Guide). While it is hard to pinpoint exactly what is behind this dramatic rise in gold prices, three key factors have likely contributed to this week’s spike: China, fears of a ‘W’ shaped economic recovery, and continued dollar weakness.
Arguably the biggest impact on gold prices is coming out of China. Hong Kong has recalled all of its gold holdings from London in efforts to keep a better watch over its bullion reserves. Some are speculating that this could be the beginning of the rise of Hong Kong as a hub for commodities trading, and some fund companies are looking to start gold ETFs using metal located on the island for backing. Meanwhile, China is also encouraging its citizens to buy gold and silver, and will soon offer gold and silver bars for sale at Chinese banks across the country. These actions are the latest indication that China has lost confidence in Western economies and is desperately trying to both protect its own gold reserves and encourage its citizens to diversify savings out of paper and into hard assets.
Double Dip and Seasonality
The coming anniversary of the Lehman Brothers collapse and the Great Panic of 2008 are likely in the minds of investors fearing a double dip recession. The recent run-up in stock prices has occurred despite the lack of any true good economic news (rather it has been fueled by ‘less bad news’), a fact that likely contributes to further anxiety.
Also, a recent report indicates that gold tends to do very well in September relative to the market, providing gains for investors 16 out of the past 20 years. Some traders may be looking to make a quick buck on this trade while capitalizing on people’s fears in the process.
Lastly, continued weakness in the dollar continues to play a major role in gold and other commodity trades. Dollar weakness is crucial to a continued rise in commodity prices, and with American debt ever increasing and with the aforementioned developments in China, the greenback looks to be under pressure (at least in the near term). Look for even further dollar weakness should Masaharu Nakagawa (or anyone with a similar philosophy) be appointed finance minister of Japan. Nakagawa is of the belief that the Japanese should only buy U.S. government bonds if they are denominated in yen, which would obviously be a negative development for confidence in the dollar.
PowerShares DB USD Index Bearish (UDN) is an ETF that is short on the U.S. dollar and bullish on Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc, making it an interesting option for investors expecting further weakness in the U.S. currency.
Disclosure: No positions at time of writing.