Spiralling gold reaches $1,000 per ounce

According to F&C market strategist Ted Scott, the recent strength in the price of gold - which is testing an all-time high at around $1000 per announce - is something of a paradox given signs of an emerging global economic recovery and soaring equity markets.

Gold is usually seen as a safe haven asset in uncertain times that performs well when investor appetite for risk dries up.

"What this is telling us is that notwithstanding the beckoning recovery, there is still a lot of fear and scepticism regarding future growth and, in particular, there is a heightened risk of inflation. Gold is therefore retaining its lustre as a ‘store of value' that can be reliably saved and retrieved," said Scott.

The strength also reflects increasing disquiet about the role of the US dollar as the world's leading reserve currency following the credit crisis, particularly from countries with large trade surpluses that have invested in US Treasury Bonds such as China.

"The US dollar's weakness has established a clear link with the ascent of the gold price as China has been reducing holdings in US Treasury Bonds and part reinvesting in gold reserves. In fact the Chinese have been lobbying for an alternative reserve currency and have proposed a paper ‘gold standard' to the International Monetary Fund. Although this is unlikely to happen, in my view the dollar will probably not regain its old status as the pre-eminent reserve currency because of the reducing importance of the US in a global context as economic power shifts Eastward," said Scott.

It is noteworthy that despite the impact of the recession reducing demand for jewellery and industry by 20%, this is more than offset by an estimated 46% increase in investment demand for gold. Scott believes than despite the recent strength, the precious metal could therefore continue to remain buoyant even in a recovery as well as providing a hedge against inflation which he regards as a real risk from quantitative easing. The risk to this scenario would be a re-emergence of the US dollar as a "safe haven" currency but Scott believes this unlikely give current macro policies.