Gold Is Just Getting Going

Gold
hit fresh highs on Tuesday as it continued to take its cues from a weak
U.S. dollar. The greenback tumbled as uncertainty over its global
strength was triggered by a report from the U.K. alleging that certain
Gulf states secretly met with Russia, China, Japan and France to
discuss replacing the dollar with a basket of currencies to trade crude
oil. The basket would include gold in addition to the euro, Chinese
yuan, Japanese yen and a new currency for nations in the Gulf
Cooperation Council, according an article The Independent that was later denied by the Gulf States. (See “Dollar Still A Good Bet For Oil.”)

Comex
gold for December delivery peaked at $1,045 an ounce, surpassing the
previous record for the most-active contract high of $1,033.90 an ounce
hit in March 2008. December futures closed Tuesday’s session at a
record $1,039.70 an ounce, up by $21.90. The SPDR Gold Trust
(
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people
) exchange-traded fund gained $2.28, or 2.3%, to $102.10 and shares of gold miners also traded higher.

Rick de los Reyes, a metals and mining analyst at T. Rowe Price,
believes the gold rally still has a long run ahead of it. Pointing to
similar trends observed during the gold rally that started in the late
1970′s, he said gold prices are in the early stages of a transition of
being driven more by investment demand than by jewelry demand. Since
investment demand is likely to remain strong with the market worried
about inflation and investors buying on pullbacks, Reyes sees gold
reaching new highs in the long-term.

While other commodities like
oil and copper also guard against inflation and may have more room to
grow, gold is the only commodity to offer additional protection against
deflation.

“Other commodities will protect against inflation,
if that ends of being the outcome of monetary policy, as expected,”
Reyes said, “But if policies fail and deflation ends up being the
problem, then those other commodities will suffer, too, since they tend
to run on industrial demand.”

Whether investors buy gold bars,
gold-backed exchange-traded funds or gold mining companies, Reyes
recommends that all portfolios include some exposure to gold since it
trades negative to the market in some periods.