SPDR Gold Trust (ETF) (GLD): Why Gold Is Making a Comeback

Haven from stormy currencies
The Fed appears close to reducing its $85 billion in monthly bond purchases, and that has stirred up currency prices worldwide, particularly in emerging markets. Investors had previously borrowed in dollars at low rates and then invested in faster growing economies in Asia and Latin America.

Now, that trend is reversing. U.S. interest rates have started to climb in anticipation of the Fed’s reduced stimulus. Investors are selling their emerging-market holdings and converting the proceeds back into dollars.

The value of the Indian rupee against the dollar has plunged by more than 11% in August on concerns that surging oil prices are pushing the country toward an economic crisis. The Indonesian rupiah has also slumped.

When currency markets become volatile, investors worldwide look to invest in safe assets that will hold their value, says Dan Heckman, a national investment consultant who specializes in commodities at US Bank Wealth Management.

“Gold does fit that role,” he says.

Jewelry buyers
Speculators like hedge funds were behind the surge in gold over the last decade. That sent gold to a peak of $1,900 an ounce in September 2011. It also priced out a large part of the market — jewelry buyers in countries like India and China. In those countries, people have traditionally bought jewelry as a way to invest in gold.

When prices slumped this spring, though, those buyers jumped back in because people in those countries bought more gold.

The World Gold Council, a trade group for gold mining companies, says in a report on Aug. 15 that consumer demand for gold surged 87% in China in the second quarter, compared with the same period a year earlier. Demand in India climbed by 71%.

Gold still remains far below its inflation-adjusted peak. It rose as high as $873 an ounce on Jan. 21, 1980. Adjusted for price increases that would be worth $2,475 in 2013.

The article Why Gold Is Making a Comeback originally appeared on Fool.com and is written by Associated Press.

The Motley Fool has no position in any of the stocks mentioned.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.