Gold prices continue to climb

Gold prices continue to climb and may break the June 21st record high of $1,265.50.

Analysts have been following this record breaking rise in prices and the demand for physical gold is expected to remain strong as the yellow metal continues to

be a safe haven investment for long-term and short-term investors alike.

As in all bull markets, the majority of gold’s price appreciation will come towards the end of the advance, when the ‘manic/parabolic’ phase hits. We feel this explosive ending is still a long way off, and that there will be lots of ups and downs along the way.

Gold’s investment returns are fairly independent from stocks, bonds and even other commodities. Portfolio diversification is an important part of investment strategies and one of the cornerstones of Modern Portfolio Theory.

The recent financial crisis and global recession put most common strategies to the test, however, and raised questions about the diversification properties of so-called alternative investments such as commodities, hedge funds and real estate. Amid the chaos, gold not only outperformed most of these alternative investments but also was one of the few assets, along with government-issued securities, to deliver a positive return of approximately 4% in 2008.

The World Gold Council has found that changes in the price of gold do not correlate with changes in the prices of other financial assets regardless of the health of the financial sector or broader economy. Gold’s lack of correlation with other assets is underpinned by the fundamentals of demand and supply. It is primarily a luxury consumption good (68% of its five-year average annual demand comes from jewelry, mostly from India and other Asian countries), but it also has an important role as an investment vehicle (20% of average demand) and in industrial applications (the remaining 12%).

In recessionary periods when consumption spending falls, gold’s role as a safe haven increases investment demand for gold, mitigating the impact on price and keeping gold’s correlation to other assets low. On the supply side, 59% of demand over the past five years has come from mine production, 28% from recycled gold and 13% from official sector sales.

Read more Gold's Low Correlation to Other Asset Classes