The  gold  price  reached a new sterling record yesterday, closing  at £386.71/oz ($804.75) at the PM fix. The previous record was set on May 12 2006 when a price of £382.73 was set at the AM fix and 382.42 at the PM fix.   The World Gold Council identified the following short term reasons for the gold price rise:

• Continued weakness in the dollar.  Gold is a statistically proven hedge against fluctuations in the US dollar, the world’s main trading currency
• Inflationary fears as a result, in particular, of high oil prices and recent or potential reductions in interest rates. Gold is seen as a hedge against inflation; while its real value can vary in the short term, it has held its purchasing power has remained stable over the centuries
• Unstable financial conditions. Gold is among only a handful of financial assets that is not matched by a liability. It can help to provide insurance against extreme movements on the value of traditional asset classes that can happen in unsettled times.

These short-term factors have, however, occurred on top of longer-term movements in supply and demand fundamentals that have supported the rise in the gold price since 2001:  

• Mine output. The gradual reduction of mine output in recent years with only a small number of major gold finds by the mining industry is constraining supply
• Jewellery demand. Strong economic growth and sustained promotion in the key gold jewellery markets of India, China and the Middle East are leading to strong demand for gold jewellery
• Both institutional and retail investors are increasingly familiar with gold’s portfolio diversification benefits. The reason for holding diverse investments is to protect the portfolio against fluctuations in the value of any single asset class. Portfolios that contain gold can be more robust and better able to cope with market uncertainties than those that do not
• Easier access to investing in gold. Gold exchange traded funds (ETFs) have been instrumental in providing easy access to investing in gold. ETFs have stimulated demand because it has become as easy to trade gold as it is to trade any stock or share, now that it is listed on at least ten stock exchanges around the world.