Gold Prices: Here's Why All the Hype Goes Beyond QE3

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It was another bumpy week for gold prices that included two-week lows and a surge to seven-month highs.

On Thursday, December gold futures increased $26.90 (1.5%) and settled at $1,780.50 an ounce on the COMEX.

This represented gold's highest close since the end of the February.

As the week comes to an end and traders waited for more news from Spain, December gold was down on Friday morning to $4.10 to $1,776.40 an ounce.

Gold's price moves came from a number of factors this week including bargain hunters and weak U.S. macroeconomic data.

The bottom line is that the QE3 rally might have fizzled, but the long-term gold outlook still shines brightly.

Here's why.

Gold Prices and Global Economic Issues

Gold prices rose Thursday on news that China would be executing additional stimulus measures and Spain would announce its 2013 budget that included potentially large spending cuts.

Travel south and there's the ongoing unrest from large gold producers in South African mines. Traders are worried about labor strikes and the effect of gold companies.

According to Commerzbank analysts, almost 40% of South African gold production has been stopped. This affects supply and therefore supports prices at their current levels, even if it won't lead to significant uptick.

Rohit Savant, senior commodity analyst at CPM Group, said South Africa's gold production accounts for about 10% of the world's supply.

"That 10% is still a substantial amount of gold production which is why we think it will be supportive of prices but not something that will push it up sharply," said Savant.

Gold as an Alternative Investment

As gold reached its seven-month high on the COMEX, across the pond it also hit a record on Thursday when priced in euros and Swiss francs.

Why? Demand is on the rise for the precious metal as an alternative investment from worries that central banks' actions will help economies, but cut the value of currencies.

Matthew Turner, a precious metals strategist atMitsubishi Corp. International (Europe) said to Bloomberg News, "Central banks are weakening their currencies to boost their economies and gold is a beneficiary. The story of weak currencies and strong gold is back in play and it's not just the dollar, it's all currencies."

Bloomberg reported bullion for immediate delivery in London hit 1,379.32 euros an ounce on Thursday; to-date it has increased 14%. Gold in Swiss francs saw its own record of 1,66718 on Thursday and on Sept. 13 the commodity in Indian rupees also peaked.

Gold as an Inflation Hedge

Richard O'Brien, chief executive officer ofNewmont Mining Corp. (NYSE: NEM), said earlier this week gold will increase to $2,500 an ounce in the next few years from investors purchasing the metal as an inflation hedge.

O'Brien said to Bloomberg, "The downside is fairly limited. If we see some economic growth we could see $2,500 in the next three or four years."

Central banks, along with the International Monetary Fund (IMF), are the largest bullion owners. They're likely to buy additional gold to diversify their reserves and protect against inflation, added O'Brien.

There's data already supporting this.

In August, IMF data showed that central banks slightly increased their holdings with such key buyers including Russia, Ukraine, Turkey, South Korea and Kazakhstan.

Mark To, a Wing Fung Financial Group analyst, told MarketWatch, "This is positive news, both psychologically and fundamentally. This buying pressure should keep gold prices strong compared with other precious metals."

This buying trend is likely to continue for the medium to long term as greater liquidity enters the global financial system.

Justin Harper, markets strategist at IG Markets, told MarketWatch, "Gold prices continue to be underpinned by growing demand from central banks increasing stockpiles during these uncertain times…we believe this trend is likely to ramp up once liquidity increases in global markets."

So as you watch gold prices rise long-term, you'll know QE3 is just one reason among many for the yellow metal's bull run.

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