By: Dr. Mike Campbell

On the back of a three week Bear run which has seen double-digit falls in the world’s major stock exchanges driven by fears that the world is about to be plunged into a second recessionary downturn and bewilderment over the sovereign debt crisis gold has risen from just over $1600 to (briefly) more than $1900 an ounce. Gold has always been regarded as the ultimate safe haven when economic storms are raging. The rise in its value can be attributed to the general nervousness, but also, perversely, because of a fear that the US Dollar is depreciating. Gold is priced in Dollars, so as the value of the currency falls, the value of gold rises, providing a nifty hedge against currency depreciation.

Investors have returned to the markets to buy up stocks which have come down to bargain basement prices (compared to where they stood at the end of July) and the markets have risen. One factor that analysts have identified for this renewed “confidence” is the perception that the US Federal Reserve may be about to embark upon a third round of quantitative easing (QE) as a mechanism to bump start the US economy. Chairman Bernanke is set to make a speech on Friday where he is expected to announce plans to support the US economy.

On the back of this renewed optimism, gold has been sold heavily as investors take profits. The precious metal fell by 9.3% in yesterday’s (Wednesday’s) trading to close at $1770 an ounce – still well above its value at the start of the month. If a further round of QE is on the cards, pressure will mount against the Dollar which is likely to push gold higher again. Confidence will not return to the markets until solid economic data points to robust growth and nations put credible plans in place to deal with the mountains of debt which they have run up in all our names.