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One kilogram gold bars (JO YONG-HAK/REUTERS)
One kilogram gold bars (JO YONG-HAK/REUTERS)

Gold rally hinges on more quantitative easing Add to ...

So is gold a haven or isn’t it?

The past month certainly put that question to the test, as deteriorating economic conditions became apparent in China, Europe and the U.S.

In the first two weeks of May, bullion prices fell 6 per cent during a time when some conventional wisdom would have suggested buying more.

Since Friday, however, gold has enjoyed a bounce and the precious metal is holding onto its price gains on Wednesday.

The price of bullion hit a one-month high today, rising 1.1 per cent to $1,635.70 (U.S.) an ounce.

The rally began Friday following weak employment data out of the U.S. The idea that the world’s largest economy may be slowing again, together the European Central Bank’s decision not to cut interest rates, has the market anticipating a new round of monetary stimulus.

For gold bulls this means further risk of inflation from government’s printing more money to throw at the lethargic recovery. In this respect, gold is being used as a haven. But with inflation still a long way from becoming a problem, it’s hard not to view the latest rally in terms of traders adding risk on speculation that further quantitative easing will eventually drive up gold.

This rally will get put to the test on Thursday, when Federal Reserve Chairman Ben Bernanke is to testify before Congress on the economic outlook at 10 a.m. ET.

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