Gold is one of the few assets still performing, soaring so far this year by almost 20 per cent, writes FIONA REDDAN

IF YOU are planning on buying gold for a loved one this Christmas, you may need to start putting more money aside, because the precious metal has just reached new highs. Over the past 10 years, the price of gold has increased five-fold, but last Wednesday it hit a new nominal record of $1,313.45 an ounce.

Can this bull run, which has lasted the past decade, be sustained or are we staring into the abyss of yet another bubble that must burst?

Traditionally, gold has been perceived as the typical safe haven asset, the last resort hedge. However, as the economic environment becomes even more uncertain, gold is one of the few asset classes that is actually performing.

So far this year it has soared by almost 20 per cent as investors around the globe flee the major currencies in search of the ultimate safe harbour. Even global central banks, which turned away from gold over the past two decades, are now expected to become net buyers this year for the first time since 1988.

For Anne-Laure Tremblay, precious metals strategist with BNP Paribas in London, the dramatic rise in the price of gold is attributable to investors looking for a safe haven in the face of two main risks – long-term inflationary concerns in the US and sovereign risk related to elevated debt levels in Europe.

“Investors’ worries are twofold: further quantitative easing by the Fed [Federal Reserve] stands to weaken the dollar, while high levels of government debt without fiscal consolidation, notably in Europe, can negatively impact the euro, as was the case in April-May this year,” Tremblay says.

Gold has soared following the Fed’s most recent policy meeting in mid-September, at which it suggested that its quantitative easing policy, by which it will look to inject more money into the monetary system by buying financial assets, could again be on the agenda.

After all, the more money injected into the US economy, the less the dollar will be worth.

When you add to these inflationary concerns the ongoing turmoil in the sovereign debt markets of European peripheral countries – including Ireland – it is no surprise that gold has performed so strongly. But can the rally – the longest since the 1920s – continue?

Tremblay has identified strong driving factors behind gold’s strength. “A bubble suggests the market is pushing the price higher without basis but gold’s price is driven by long-established dynamics, notably the longer-run inflationary implications of money creation and uncertainty regarding other assets like bonds in relation to perceived sovereign risk and more recently uncertainty in the pace of economic recovery.

“Gold, from a market sentiment point of view, is taking on the mantle of the asset that will hedge against anything that could wrong,” she says.

Unlike the gold rally of the late 1970s, which was linked to inflation and the oil crisis, this time around it is all about broad economic uncertainty and sovereign risk concerns.

As Mark O’Byrne, executive director at Goldcore, says: “Nobody has a crystal ball but there is an array of reasons to suggest that it may continue for the foreseeable future.” He notes that gold is some way off its highs of the 1970s, when it reached $2,400 on an inflation-adjusted basis. Gold is “not yet expensive”, and would need to reach $1,450 to move into more expensive territory, although at the $2,000 level, he says it would start to represent a bubble.

O’Byrne cites “a return to normality in world financial markets, a return to a world where the solvency of banks and entire nations are not in doubt, a return to more normal interest rate levels above 5 per cent” as necessary before the price starts to decrease.