Gold has been steadily rising since December 29 last year when it touched the lowest level since July 6. It rebounded from $1,522.35 to peak at $1,640.05 in New York trading on Tuesday.
The precious metal had traded most of 2011 as a safe haven asset, gaining as much as 43 percent to peak at a record high of $1,920.80 on September 6 amid the turmoil surrounding the European debt crisis.
However, recently gold appears to act more like other commodities and riskier assets, following mostly EURUSD direction.
Gold in the past has had a strong inverse relationship with the US dollar, rising when the dollar fell. Over the last week gold traded in a tighter formation having more connection with euro- dollar.
The reason for this has come about due to the massive liquidation driven by hedge funds in the gold market during the last few months of 2011. These large investors lost confidence on the idea that gold’s value would hold up if the euro zone debt crisis triggered a global financial meltdown. While a European recession might have hurt the euro but left gold prices unscathed, a sudden implosion in Europe’s banking sector would threaten gold and nearly every other asset. These finds preferred to liquidate gold to cash in to hold cash in dollars instead, as the US currency is the world reserve currency.
Strong physical demand for the metal has also been on the rise in Asia, helping lift prices. China, Taiwan, Hong Kong, Vietnam and Thailand may boost gold purchases for gift-giving ahead of the Lunar New Year, according to U.S. Global Investors Inc.
“Physical investment and jewellery demand has been strong into price falls below $1,650, with Chinese buyers particularly active,” Nick Moore, an analyst at Royal Bank of Scotland Group Plc, wrote in a report today. Demand from China “is likely to increase this month irrespective of price, in the run-up to the Chinese New Year Holiday.”