Damaskos contended that the continued uncertainty regarding the level of borrowing by the US government in 2014 will weaken the purchasing power of the US dollar. Gold, in its traditional role as a hedge against inflation, would benefit from such a scenario.
There was much surprise among market observers that, during the recent US debt ceiling crisis, the price of gold actually fell to below $1,300 an ounce.
Many market observers would have anticipated that in a climate of such uncertainty, the gold price should rise. Damaskos posits the view that the uncertainty in the US is not in itself an upward driver of the gold price; rather it’s the fact that the value of the dollar will decline as the government borrows more. This will, in Damaskos’s view, result in traditional dollar investors moving into gold.
He believes that a second upward driver of the gold price is the recent increase in demand from emerging market consumers. Data from the World Gold Council revealed that demand from emerging markets for gold bullion rose by 78 per cent in the second quarter of 2013.
This is a trend that Damaskos thinks will continue, as volatility in some emerging markets drives consumers towards gold, with the asset in this case performing the second of its traditional functions – that of being a ‘safe haven’ asset in times of strife.