Gold prices are surging again and could set a new record of $2,400 by next summer. The reason? A third round of quantitative easing in the US and more economic stimulus from other central banks around the globe.
The first round of QE in February 2009 drove gold higher from $900 an ounce and it has been rising ever since. Gold was trading at six-month highs and rallied to a near 11-month high above $1,791 last Thursday after the Federal Reserve unleashed more stimulus for the American economy. Gold stocks have also had an impressive run.
Bullion, which is currently trading at $1,763 an ounce, has been given a boost by the Fed pledging to buy up billions in mortgage-backed securities and to keep interest rates near zero till late 2014.
Analysts at Société Générale noted recently: "Gold prices are highly sensitive to the evolution of the monetary base which expands during quantitative easing. During QE1 and QE2, gold prices increased 36% and 21% respectively."
Gold bugs can't get enough Fed stimulus, the Wall Street Journal wrote recently - check out its charts here. Precious metal is seen as the perfect hedge against inflation, which could go up as a result of more quantitative easing.
BlackRock fund manager Evy Hambro, who invests in the precious metal and gold stocks, predicts that QE3 could push the gold price to $2,400 an ounce by the middle of next summer.
In his latest gold report he says: "The gold chart has turned decidedly bullish with the 50-day moving average rising above the 200-day moving average. The last time this happened was in February 2009, which interestingly was shortly after the implementation of QE1. Then, gold was $900 an ounce and never looked back. Should we witness a similar rally, prices would be taken to $2,400 an ounce by mid-summer next year – and $1,760 an ounce would be the new floor."
According to the International Monetary Fund, central banks keep buying gold, with South Korea and Paraguay recently boosting their reserves. Thomson Reuters GFM reckons central banks will buy 493 metric tons of bullion this year, up 7.9% from 2011. They are diversifying away from the dollar and trying to protect themselves from rising inflation.
Hambro says: "If the third round of quantitative easing leads to further weakness of the US dollar, central banks may be prompted to switch more cash reserves into gold."
So bullion and gold mining shares could well be worth a look. You could also cash in by selling any unworn gold jewellery or scrap metal.