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The reason why gold might still reach the $2000 mark

Gold might still reach the $2000 mark despite suffering its largest three-day price drop in 28 years this week.
After an incredible run since January, which culminated in a record level of $1900 an ounce at the start of September, the gold price momentarily dropped to below $1600 this week, raising fears that the gold bubble has burst.

But the gold price is not likely to collapse in the short term and could still reach $2000 in the coming year, analysts said this week.

According to Josina Oliphant, commodities analyst at Rand Merchant Bank, the fundamentals that drove the gold price up, including high global liquidity levels and low interest rates in leading economies, are still in place.

“As long as the problems in the eurozone persist, the demand for gold as a safe-haven asset will continue,” she said.

“The demand for gold as an inflation hedge has come down somewhat as US long-term inflation expectations came down, but the longer-term fundamentals are still in place, so we still think the gold price can end the year at $1900 an ounce.”

Oliphant said because the gold price was still far from its real high of about $2500 reached in the 1980s – taking inflation into account – there was scope for it to move higher and reach $2000 in the next year.

US Federal Reserve chairman Ben Bernanke said in August that US interest rates would not be raised until at least the middle of 2013, a surprisingly long-term commitment for a central banker.

Oliphant said as long as US interest rates stayed lower for longer, it would benefit the gold market.

Walter de Wet, head of commodity research at Standard Bank in London, said there was a good chance of gold reaching $2000 before the end of 2011 or in the first quarter of next year, because governments and central banks had ample incentive to continue creating liquidity.

“If central banks keep on printing money and more money goes into circulation, the value of gold as a currency increases in relation to other currencies,” he said.

De Wet said one of the reasons for the recent slump in the gold price was a breakdown in the money market.

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Posted by on October 2, 2011. Filed under Precious metals. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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