Central Banks Will Devalue Currencies, Gold ETF Bulls Say

October 5th at 3:32pm by Tom Lydon

When it comes to gold, many investors are making a bullish case for the precious metal based on the recent actions from the Federal Reserve and other central banks. The theory is that ongoing monetary stimulus will devalue currencies and make the precious metal more attractive.

Yet gold and related ETFs are benefiting from other global factors as well.

In the U.S., the Fed promised to purchase $40 billion in mortgage-backed securities monthly, along with extending its Operation Twist program, writes Chris Vermeulen for Resource Investor. [Gold ETFs Eye 2011 High on Central Bank Stimulus]

“Gold finally found the catalyst it had been waiting for all year after the Fed announced open-ended quantitative easing,”  Barclays precious metals analyst Suki Cooper said in a Financial Times article.

However, this is only one aspect that has helped gold prices inch back to $1,800 per ounce – in terms of the euro, gold prices hit a record high €1380, and allowed gold ETFs to rake in 2,554 metric tons of physical gold, a new record high. [Gold ETF Bullion Holdings at Record After $3B Monthly Inflow]

In Asia, the Bank of Japan also launched a fresh round of monetary stimulus to help its ailing economy. [Japan ETFs Still Trying to Get in Gear]

The European Central Bank promised to purchase an “unlimited” quantity of eurobonds to stabilize the region’s financial crisis. Nevertheless, fiscal problems abound, especially in Spain where banks are refusing to implement austerity measures that are necessary for bailouts. Consequently, the World Gold Council estimates that physical demand for gold in Europe has jumped 15% in the second quarter.

Moreover, in India, the rupee currency is strengthening against the U.S. dollar. As the world’s largest consumer of gold, India demand is a major factor to gold prices, and the stronger rupee will allow the country to purchase more of U.S. dollar denominated gold.

Gold ETFs include:

  • SPDR Gold Shares (NYSEArca: GLD)
  • iShares Gold Trust (NYSEArca: IAU)
  • ETFS Swiss Gold Shares (NYSEArca: SGOL)
  • PowerShares DB Gold Fund (NYSEArca: DGL)

SPDR Gold Shares

For more information on gold, visit our gold category.

Max Chen contributed to this article.

Full disclosure: Tom Lydon’s clients own GLD.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.