Gold Still a Safe Bet Despite Fall from Record High Prices

Gold prices saw major ups and downs this week, with a drastic fall of over $100 on Wednesday. After reaching Tuesday’s closing price of $1,921.15, the prices suddenly plummeted on Wednesday. This steep fall is said to have occurred due to Swiss National Bank’s (SNB) efforts to limit the strong appreciation in the Swiss franc. However, even with the drastic changes in prices and the recent volatility, analysts still believe that gold is one of the safest investments in the current economy. The volatile market and the recession have forced investors to turn to gold for the last three years and that trend is not likely to change any time soon.

Impact of SNB’s intervention on gold

Analysts seem to be split on gold’s prospects in the near future. Some market strategists believe that SNB’s efforts to limit drastic currency appreciation will soon have a positive effect on gold. However, a counterview coming out of some circles is that gold is not a foolproof asset and any belief that regards gold as an infallible asset is a misconception. On the other hand, some analysts take a neutral stand. They believe that despite the minor setback suffered by gold due to SNB’s intervention, the long-term plans of the SNB will have a positive effect on gold. SNB’s actions are somewhat similar to a quantitative easing that took place in the US recently, which turned out to be a positive for gold and some other assets.

Possibilities of another quantitative easing

Switzerland presently owns 1,400 tons of gold. A small portion of the gold reserve was liquidated and sold in 2007, a motion that was not supported by the political system in the country. SNB being a member of the CBGA (Central Bank Gold Agreement) restricts its annual gold sales to 400 tons, so substantial quantitative easing through gold is not a viable option. If SNB were to opt for the entire allotment, it would earn CHF (Swiss Franc) 20.8 billion. On the other hand, the intervention last year during the month of May earned SNB over CHF 78.6 billion, which didn’t do much for abating the currency rise. It may indicate that the short term fall in gold price may just be over.