Further quantitative easing (QE) across the globe has given the green light to a spike in the gold price, according to HSBC Private Bank’s Esty Dwek (pictured).

The investment strategist believes the stimulus measure will lead to a significant boost in investor sentiment, higher inflation expectations and a weaker US dollar – all positive for bullion. 

"Following nearly a year of range-trading, gold is on its way up again, thanks mainly to what is being called QE infinity – the third round of quantitative easing which is unlimited in time and scope – in the US," she said.

"Aggressive action by the ECB, the Bank of England and the Bank of Japan are also supporting gold prices, in our view." 

According to FE data, the S&P GSCI Gold Spot index is little changed over one year, up 6.27 per cent since 1 October 2011.

Performance of index over 1-yr



Source: FE Analytics

Bullion has traded between $1,500 and less than $1,800 over this period, but in recent days has flirted with the higher band. Dwek believes it will pierce the range before long and continue to gather momentum. 

She points to a weakening US dollar in particular as a positive factor for gold, both directly and indirectly. 

"An important side-effect of the central bank interventions is the weakness in the US dollar, both as a result of currency debasement by the Fed’s ongoing printing and reduced tail risk in Europe, which is waning off demand for safe havens and the dollar in particular, and supporting the euro," she said. 

"In our view, dollar strength had been one of the main hurdles for gold prices, but should no longer be. Indeed, gold and the dollar tend to be strongly negatively correlated, except in times of extreme risk aversion."

"To a large extent, this is because dollar weakness makes the price of gold in local currency terms cheaper for emerging market buyers."

"We believe that emerging market currencies will rise against the dollar as a result of the improving investment environment and the debasement of the dollar, which should support demand for gold as well." 

Dwek also think worries over rising inflation as a result of QE will continue to support the gold price beyond the short-term.

"The huge amount of liquidity that is being injected into the financial system by the central banks is leading to higher inflation expectations, particularly over the medium-term," she said.

"Indeed, US five-year breakeven rates in bond markets have jumped in the past few months, showing that investors expect the current coordinated monetary easing by central banks to lead to inflation further down the line." 

"Gold is typically seen as a good inflation hedge and therefore has been benefiting from rising inflation expectations over the medium-term." 

In the even longer term, she believes the durable demand shown by emerging market central banks is a tell-tale sign that gold is a good investment at current prices. 

"Even during times of risk aversion when gold was range-trading well below current prices, we believe that emerging market central bank demand was keeping a floor under prices," she said.

"Emerging market central banks are looking to add to their gold holdings in order to diversify their foreign exchange reserves." 

"As a result, we believe they were buying gold at relatively lower levels, but we expect this trend to persist over the longer term, providing underlying support to gold prices." 

Dwek is not alone in her enthusiasm for gold: FE Alpha Manager Sebastian Lyon has recently added to his overweight in the precious metal, while Ruffer’s Steve Russell has 8 per cent of his CF Ruffer Total Return fund in gold and gold equities.