INTEREST RATE policy, quantitative easing and increased government debt are expected to lead to a higher Gold Price in 2012, according to a report released today by research strategists at Standard Bank.
The report's authors say there are two long-term causal drivers of the Gold Price:
- Global liquidity – which they measure by using the US Federal Reserve's balance sheet plus foreign exchange holdings
- Real interest rates – nominal rates minus the rate of inflation
"Global liquidity should continue to grow as long as (a) governments increase their nominal debt burden and/or (b) central banks, such as the US Fed, implement quantitative easing measures," the report says, including a chart – available to view here – that shows rising liquidty and the price of gold since 2004.
The report estimates that global liquidity will grow by 18% in 2012 – compared to 20% this year and 16% in 2010.
Real interests meantime remain low or negative in many parts of the world, including the US, UK and Europe. In August Fed chairman Ben Bernanke said the economic conditions are likely to warrant "exceptionally low" interest rates until at least mid-2013.
The report also notes that strong demand for physical Gold Bullion – particularly from India and China – could also support the Gold Price.
"Recently, with gold having slipped below $1,650, physical buying interest rose sharply," it says.
"We believe that sustained increases in annual demand from India and China will support the gold price in the long term. Under these circumstances, any increase in demand should serve to moderate any sharp downward correction in prices."
The authors do, however, note that "short-term influences" – such as concerns about credit risks, currency moves and movements in stock markets – could "make the Gold Price oscillate around the long-term trend".
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