Why Gold Prices Will Explode Following Disappointing First Quarter

LONDON -- Resurgent confidence in the global economy has propelled equities higher in recent months, and investors have in turn shunned the safety of traditional flight-to-safety asset gold. Indeed, the yellow metal is set to record its worst quarterly performance in more than a decade following a 3.7% drop to around $1,600 per ounce.

However, I am convinced that a backdrop of rising inflation -- coupled with enduring hiccups in the macroeconomic recovery, particularly in the eurozone -- should send yellow metal interest higher as the year progresses. Gold bugs can latch onto rising metal prices through SPDR Gold Trust  (NYSEMKT: GLD  ) and Gold Bullion Securities  (LSE: GBS  ) , instruments that are designed to track movements in the gold price.

Central banks remain active gold buyers
A recent report from UBS showed official sector purchases in the first two months of the year come in at 54 tonnes, Forbes reported, representing a value around $3 billion.

Central banks, most notably in the world's key emerging markets, have continued to bulk up their gold reserves in recent months. South Korea purchased 20 tonnes of the metal, it was announced earlier this month, while Russia and Kazakhstan also made substantial purchases in February.

Gold purchases by the world's central banks came in at 534.6 tonnes in 2012, according to the World Gold Council, the highest level since 1964 and up 17% from the previous 12-month period.

The official sector has increasingly turned to the traditional safe-haven asset as an alternative to paper currencies, the value of which are expected to keep on eroding amid renewed stimulus measures in the West.

Monetary easing set to continue
In the U.S., Chicago Federal Reserve President Charles Evans just yesterday commented that the country's central bank will maintain its bold asset program until a significant uptick in the jobs market materialises. This is not expected until the turn of the year at least.

Further afield, new Bank of Japan governor Haruhiko Kuroda is expected to aggressively bolster asset purchases in a bid to reach the institution's 2% inflation target and end decades of deflation. Meanwhile, the European Central Bank is also widely tipped to cut rates, possibly as early as next week's meeting, to boost the region's flagging economies there.

To compound the global inflation problem, countries around the world are actively weakening their domestic currencies in order to keep their exports competitive. These "currency wars" are expected to ratchet up over the course of the year, placing further pressure on the value the world's fiat currencies.

Interest in gold ETFs climbed during the height of the Cyprus bailout crisis, and in my opinion the likelihood of further political turmoil -- combined with deteriorating economic data -- should again boost gold inflows. Fallout from last month's Italian election continues to rumble on, while German Parliamentary elections in September should herald fresh waves of uncertainty and thus interest in store-of-value gold.

Mine gold stocks for gains
Investors can also gain exposure to a rising gold price through shrewd stock picks in the mining sector. Galloping demand for natural resources should continue to drive broader commodity stocks higher over the long-term.

This special wealth report from The Motley Fool -- "10 Steps to Making a Million in the Market" -- gives investors the lowdown on how to make a mint from choice stocks in the mining sector, including one major African-based gold producer. Click here now to download our totally free report.

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  • Report this Comment On March 29, 2013, at 11:29 AM, Adatageek wrote:

    Even Cyprus blowing up hasn’t pushed gold prices higher - it seems fairly priced right now when compared to other investment opportunities such as oil or equities. Check this post to get a sense of the ratios:

    http://opendatadepot.org/blog/entry/4/gold-price-forecast/

    It probably won’t go back to the sub 1000$ level but I’d forget about much higher prices in the short term...

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