SPDR Gold Trust (ETF) (GLD): Why Gold Prices Will Explode Following Disappointing First Quarter

LONDON — Resurgent confidence in the global economy has propelled equities higher in recent months, and investors have in turn shunned the safety of traditional flight-to-safety asset gold. Indeed, the yellow metal is set to record its worst quarterly performance in more than a decade following a 3.7% drop to around $1,600 per ounce.

However, I am convinced that a backdrop of rising inflation — coupled with enduring hiccups in the macroeconomic recovery, particularly in the eurozone — should send yellow metal interest higher as the year progresses. Gold bugs can latch onto rising metal prices through SPDR Gold Trust (ETF) (NYSEMKT:GLD) and Gold Bullion Securities Limited (LON:GBS), instruments that are designed to track movements in the gold price.

Central banks remain active gold buyers
A recent report from UBS AG (USA) (NYSE:UBS) showed official sector purchases in the first two months of the year come in at 54 tonnes, Forbes reported, representing a value around $3 billion.

Central banks, most notably in the world’s key emerging markets, have continued to bulk up their gold reserves in recent months. South Korea purchased 20 tonnes of the metal, it was announced earlier this month, while Russia and Kazakhstan also made substantial purchases in February.

Gold purchases by the world’s central banks came in at 534.6 tonnes in 2012, according to the World Gold Council, the highest level since 1964 and up 17% from the previous 12-month period.

The official sector has increasingly turned to the traditional safe-haven asset as an alternative to paper currencies, the value of which are expected to keep on eroding amid renewed stimulus measures in the West.

Monetary easing set to continue
In the U.S., Chicago Federal Reserve President Charles Evans just yesterday commented that the country’s central bank will maintain its bold asset program until a significant uptick in the jobs market materialises. This is not expected until the turn of the year at least.

Further afield, new Bank of Japan governor Haruhiko Kuroda is expected to aggressively bolster asset purchases in a bid to reach the institution’s 2% inflation target and end decades of deflation. Meanwhile, the European Central Bank is also widely tipped to cut rates, possibly as early as next week’s meeting, to boost the region’s flagging economies there.

To compound the global inflation problem, countries around the world are actively weakening their domestic currencies in order to keep their exports competitive. These “currency wars” are expected to ratchet up over the course of the year, placing further pressure on the value the world’s fiat currencies.