Gold at new record high

Last week, we forecasted that gold would reach a new record high in March. Already on the first day of the month, gold rallied above 1,430$/oz and surpassed the former record high at 1,430.95$/oz recorded on December 7, last year. On Wednesday, gold reached the next new record high at 1,439.5$/oz. However, on Thursday, gold plunged by more than 20$, but ended the week at 1,420.8$/oz. Especially the trading pattern of the last two trading days of the preceding week show that gold is currently driven by two opposite forces.

On the one hand, gold still profits from geo-political tensions in the Middle East and North Africa, the MENA region. As there is a wide spread fear that the tensions might not remain contained to Libya but could spark off unrest in other oil producing countries, in particular in Saudi Arabia, the price of crude oil rose further. The energy complex has not only a high weighting in commodity price indices, but also in consumer price indices. Therefore, the surge of oil prices will have an impact on CPI inflation. As gold has the reputation to serve as a hedge against inflation, the fear of rising inflation rates is another factor supporting gold and other precious metals.

But on the other hand, many central banks are worried by the rise of headline inflation rates. After central banks in emerging economies already changed the stance of their monetary policy and lifted interest rates higher, central banks in Western industrialized countries were hesitant so far. The monetary policy committee of the Bank of England already discussed rate hikes, but the majority preferred to keep rates on hold fearing a dip back into recession as the fiscal austerity policy of the Cameron government is already a drag on the economy. While the consensus was looking for a strong increase, the GDP in the final quarter of last year already surprised by an unexpected fall. And this decline of GDP was not only due to snow falls in December. However, the biggest surprise came from the ECB last Thursday. At the monthly press conference following the council meeting, ECB president Trichet announced that the repo rate might be increased as early as next month. A rate hike in the eurozone could also tip the balance within the MPC of the BoE. Thus, interest rates in Europe are likely to increase rather sooner than later.

A rate hike by the two major central banks in Europe would be negative for gold for two reasons. First, the opportunity costs for holding gold would rise. This would be especially negative, if the ECB and the BoE embark on a series of rate hikes. Second, tightening monetary policy would have an impact on inflation expectations. If investors expect that inflation will remain well anchored close to the target rates, they might liquidate gold holdings.

However, there might also be another opposite effect. Fed chairman Bernanke is not concerned about the impact of rising oil prices on core PCE inflation. Thus, he provided no hint at the testimony last week that QE2 might be terminated earlier than scheduled. Many commentators, analysts and strategists expected the central banks to hike rates earlier than the Fed. Nevertheless, rate hikes in Europe are now probably implemented far earlier than expected. This is weighing on the US dollar and a weaker US dollar could be a supporting factor for gold.

Large speculators have increased their net long position in gold futures last week again, according to the latest CoT report of the CFTC. The non-commercials added to long positions in the week ending March 1^st and reduced short positions. Thus, the net long position rose by 16,829 to 197,253 contracts. Gold holdings at the SPDR Gold Trust ETF continued to decline, but at a slower pace as only 0.9 tons were sold.

All in all, gold could still rise to fresh record highs in coming weeks. However, the headwinds are probably getting stronger.