(MENAFN - The Peninsula) There is an unprecedented surge in gold prices but the supply of the precious metal is rising at a very slow and predictable level through mining, growing by about 1.5 percent annually, says QNB Capital.
Although gold has reached historical highs in nominal terms, it is still well below its all-time peak in January 1980, if adjusted for inflation, QNB Capital said in a statement yesterday.
Its price at the peak was equivalent to about 2,400 an ounce at current prices. Bullish traders also argue that if gold is compared to commodities and assets, such as oil and equities rather than currencies, it may not yet be overpriced.
In any case, the jump in gold prices over the last month has been driven by the serious concerns weighing down on the US dollar and euro. This has intensified the focus on gold as a safe haven from the risk of currency devaluation.
Debt crises in certain European countries, especially Greece, have weakened the euro. The dollar in the mean time is suffering from the falure of the US government to agree on raising its borrowing ceiling, which needs to be done to avoid Washington defaulting on its debt service obligations for the first time.
The US crisis could yet be resolved by a last-minute deal between Republicans and Democrats. It might also be delayed by a decision to prioritize debt interest payments over other government obligations, such as salaries.
According to QNB Capital, a delay could, probably, boost gold rates further, while a deal might lead to a partial recovery of the dollar against gold, depending on its terms.
Gold has risen to over 1,600 per ounce, up 30 percent on the average in 2010. The rise is a consequence of gold being seen as a safe haven while uncertainties surround major currencies.
The value of gold reached new heights in July 2011 against the dollar, euro, Japanese yen and British pound. These are the four most heavily-traded currencies, involved in over three quarters of all foreign exchange transactions.
The gold price has been rising strongly over the last two years owing to demand from private investors and some central banks. This has partly been in response to the US, Eurozone and UK expanding the supply of their currencies to help revive their economies from the 2009 recession.
Many central banks hold large amounts of gold in their reserves, equal to 18 percent of the global above ground gold stock of around 168,000 tonnes (now valued at over 8 trillion). A similar amount of gold is held by private investors in the form of gold bars and coins, who often view it as a hedge against inflation.
The majority of global gold, about 51 percent, is in the form of jewellery, much of it used to store wealth. Gold also has direct uses in industry, electronics and dentistry. This wide range of uses-as a currency, asset or commodity-complicates assessments of gold's fair value.