London - Switzerland's decision to peg the erstwhile safe
haven franc to the euro may finally give gold bugs the chance to see prices hit
the once-unimaginable $2 000 an ounce mark, as the metal holds on track for its
strongest annual rally in three decades.
The Swiss National Bank (SNB) shocked global markets on
Tuesday by saying it would buy unlimited quantities of foreign currencies to
prevent the franc from rising above 1.20 Swiss francs to the euro, as it fights
to contain the meteoric currency rise that threatens the country's exports and
economy.
By buying euros in unlimited amounts to weaken the franc,
the SNB is in effect putting more of its own currency into circulation, which
threatens to trigger inflation.
It has also impacted the Swiss currency's status as a haven
in its own right. While gold prices initially dipped as the move sparked a rush
to liquidity in the form of other currencies such as the dollar, the SNB move
is likely to lend firm support to gold in the medium term, analysts said.
"All in all, Switzerland is now on a quantitative
easing policy in the foreign exchange markets," said Peter Fertig, a
consultant for Quantitative Commodity Research.
"If the Swiss franc is no longer a preferred safe haven
due to intervention by the SNB, it will have (a positive) impact on the demand
for gold."
Much of gold's rise this year - it is currently up 34% since
January, on track for its largest yearly gain since 1979 - has been fuelled by
cheap cash, provided chiefly by Western central banks battling debt piles large
enough to derail global growth.
Even without the SNB, the deterioration in the eurozone debt
crisis and the US economy's inability to create a single job last month had
already prompted many analysts to upgrade their gold price targets this year.
The $2 000 mark is now coming clearly into view - though its sustainability at that level is unclear.
"$2 000 is just another number.
"There is no reason why it can't go through that, can't
go a long way through that," said Natixis strategist Nic Brown.
"This explosion in liquidity creates demand for gold
and creates the perception for gold prices to go higher," he said.
"But ultimately, this is a bubble fuelled by liquidity."
Adjusted for inflation, gold already hit $2 000/oz in October
1980. In 1980s money, Tuesday's record high gold price of $1 920.30/oz is only
worth $720.
But its rally is impressive nonetheless, with the metal set
to end September with its twelfth quarterly gain in a row, its longest such
winning streak in at least 30 years. Switzerland's move is just the latest
piece of supportive news for the metal.
"I think gold is headed for $2 000. In theory, this
could happen in a matter of days," said Frank McGhee, head of precious
metals trading at Chicago's Integrated Brokerage Services.
"In reality, if this type of intervention action was
taken and was ultimately seen to be ineffective, then the market will get new
strength from that."
Last safe haven?
Gold is part of the family of safe haven assets, such as
top-ranked government debt and, until now, the Swiss franc, so named for the
reassurance they offer investors when markets become unstable.
With US Treasuries stripped of their triple A status in August
by Standard & Poor's, German Bunds wavering as investors ponder the cost to
the eurozone’s richest economy of bailing out its neighbours, and the Swiss
franc now shackled to the euro, gold is viewed by many to be the last safe
haven standing.
"We've seen US Treasuries have their reputation as
'risk-free assets' damaged, now we've got the Swiss franc subject to
substantial and ongoing intervention by the SNB, so yes - it does strengthen
gold's claim as a safe haven," said Credit Suisse analyst Tom Kendall.
"Prior to this announcement, I was among those who
thought we needed to correct a bit from the $1 910 area and was looking for a
short-term correction," he said.
"But I think given this, and in light of the ongoing
pressures from the European interbank funding market... I don't see any real
barrier to gold moving above that $1 920 mark."
Aside from investor concern over the stability of the
economies backing currencies such as the dollar, the euro, the pound or the
yen, the growing desire among emerging market central banks to diversify their
foreign exchange reserves has been a major supporting factor for the bullion
market.
The most recent data from the International Monetary Fund
shows the world's central banks have bought some 200 tonnes of gold this year,
led by Mexico, Russia and South Korea. Investors in exchange-traded products
backed by physical gold have increased their holdings by a net 75t in 2011.
The SNB's "shock and awe" decision may prompt even
more of this kind of investment.
But not everyone buys into the argument for gold as a
refuge, with some investors, particularly those with shorter time horizons,
pointing to recent volatility in the gold market as a reason to be wary.
Gold traded in a greater than $300 range in August, its
widest one-month spread in real terms since 1980.
"Safe means stability. What we're seeing in the gold
market is anything but stability," said US-based independent investor
Dennis Gartman. "Anything that moves as gold has moved today - from $1 920
all the way down to $1 870 in a course of five minutes - is hardly safe."
"That does not mean gold will not continue to draw
capital," he said.
"It was high the last time it got to $1 900. Then it
fell quickly to $1 700. It ceased being overbought at that time. It's not
overbought now."