iron ore, we think there are more opportunities there compared with gold.”
The price of gold was driven sharply higher as monetary authorities around the world fought to stave off the worst effects of the financial crisis by dropping interest rates and flooding their economies with cheap money.
That benefited gold by boosting its appeal as a safe store of value and a hedge against inflation.
Gold's positive reaction to quantitative easing (QE) — essentially the injection of more cash into a country's economy by its central bank — has become shorter and shallower with each round. During the US' first round of QE, from November 2008 to March 2010, gold rose more than 30%.
Since the Federal Reserve unveiled its third round of QE in September, an open-ended scheme to buy $45 billion a month in mortgage-backed securities, prices have fallen nearly 4%.
Expectations are also starting to emerge that the Fed's QE may be drawing to a close. “There is a greater chance today than there was last year that we might start to see QE being less prevalent,” BlackRock fund manager Evy Hambro said. "But the great concern for the US economy is not to do it too soon.” One of the reasons why QE is considered good for gold is that it stokes fears of inflation. During periods of inflation gold is expected to hold its value while that of other assets is eroded.
Not everyone is convinced. In a note produced last month, which preceded a $40 drop in the gold price, HSBC Asset Allocation said that it preferred treasury inflation-protected securities as an inflation hedge. “If you get inflation, provided you get a monetary response to it (in the form of) higher interest rates, that is the death knell for gold,” JP Morgan's Gregson said.