THE DRIVERS BEHIND GOLD ADVANCE / THE FINANCIAL TIMES ( HIGHLY RECOMMENDED READING )

June 23, 2011 7:23 pm

The drivers behind gold’s advance

Jamie Chisholm

Gold was hurt by the firm dollar on Wednesday but is it poised to hit another record high? The chart patterns are certainly bullish. They show the yellow metal consistently bouncing off the long-term support level and apparently threatening to break resistance around the $1,555 an ounce mark.

The intraday high of $1,576 was reached the same day equity benchmarks hit their cyclical peaks, prompting some to argue that the bullion’s recent advance was mainly a result of broad risk appetite.

But whereas the S&P 500 is more than 5 per cent off the May high, gold has recovered much lost ground. The cost of gold relative to silver, meanwhile, a risk appetite proxy known as the Mint Ratio, has risen from a low of 32 to 43, as silver has stalled.

So if it’s not broad market exuberance driving gold, is it the old inflation factor?

Not now. The US five-year break-even rate, which tracks inflation expectations, has dropped from 2.47 per cent at the start of May to a five-month low of 1.89 per cent.


This all suggests central bank asset diversification, worries about the global economy and particularly fears about the eurozone fiscal mess are the drivers now emboldening gold bugs.

Copyright The Financial Times Limited 2011.