There's Nothing Like the Prospect of War to Kick-Start Gold


...with even conservative analysts looking to gold back over $1,000 this year and global economic factors continuing to look bleak and inflation beginning to rear its head across the board, the precious metal's value as an inflation hedge should continue to buoy the price up. Meanwhile investment demand seems likely to continue strong, so one could feel downside risk is perhaps rather less than that of the general stock markets.

Middle East war rumours are flying and the gold price is up sharply as a result, although there are a number of other strong fundamentals boosting the yellow metal's price too. Over the past couple of days, we not only have reports of more Iranian missile tests, but also of test runs by Israeli warplanes simulating attacks on Iranian nuclear facilities. How much of this is sabre rattling, and how much is for real will no doubt unfold over the next few days. But whatever happens the threat of further conflict in the Middle East is positive for gold - and extremely worrying for the rest of the world as well as for the potential protagonists.

Coupled with the global economic woes and a furthering weakening of the US dollar against key currencies, gold could be set for a good boost if Middle East tensions continue, despite the mitigating impact of the northern hemisphere summer holiday season - traditionally a weak time for the metal.

The recent report from the World Gold council that members of the Central Bank Gold Agreement had sold 297 tonnes of gold so far in this agreement year (which ends in September), suggests that the full 500 tonne quota will not be released to the markets this year is positive for the market, as has been the news of a sharp fall in South Africa's first half gold production... But what does seem apparent is that the big gold price increases seen over the past few years have been insufficient to stimulate any significant global gold production increase. Indeed output may well remain flat, or even show a small decline, over the next few years...

We have also heard that investment demand from gold ETFs is continuing to increase soaking up any other surpluses in the gold market, and while gold may not react quite as other commodities do in terms of supply and demand parameters, the tight situation does help underpin the price.

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