New gold rush: Where’s the ceiling?

Gold is nearing its highest price in four months as investors await a weekend meeting of central bankers that could shed light on the likely course of US monetary policy.

Gold has gained 3.1% so far in August, and is heading for another record high since January. Central bankers and finance ministers from around the world are to meet at Jackson Hole, Wyoming on August 31 and September 1. Investors will be looking for hints from Fed chairman Ben Bernanke on measures the central bank might take, and specifically whether they will buy bonds to grease the wheels of the financial system.

Gold has doubled in value since the Fed launched its first round of quantitative easing in late 2008. Despite some uncertainty on the market in recent weeks, investors have been buying gold more often. Holdings of gold in exchange-traded products hit a record 71.53 million ounces on Friday. The gold market has been bullish for the last 11 years.

Tim McCutcheon from ABZU Gold says it's the volume of money that makes gold prices go up: “They’ve printed so much money in the past three years that though the velocity does kick in, the effect it has is much bigger because there is much more money out in the system. And that’s when you get the gold price to go up dramatically."

In the Q2, central banks around the globe have increased their gold reserves by 157.5 tons – twice the year-on-year basis. Particularly, the central banks of Russia, Ukraine, Kazakhstan and the Philippines were among the most active, according to WGC. In early August, the Chinese state-owned People’s Daily reported that the Chines government is expected to increase its gold reserves sixfold, to 6,000 tons, in the coming years.

Despite all the fuss, analysts do not see any evidence of a bubble in the commodity. McCutcheon  says “very few people have gold-related stocks in the overall investment portfolio. So it doesn’t smell like a bubble.” However, many bubbles are never identified in time.