It wasn’t surprising at $1000/oz, but even at $1100/oz this week, the naysayers are still in full force. What’s to deny about the trend in gold prices? You don’t have to be a gold bug to see what’s happening.
Here are the six main factors causing the price of gold to continue to rise. In some way or other, they can all be boiled down to (1) insurance and wealth protection due to general uncertainty regarding the (US) economy and (2) speculative investing also due to negative (US) economic forecasts.
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US Economic Balance Sheets
The balance sheets of the US government look really, really bad. Yes, the US is insolvent, and if it were a corporation, it would be bankrupt. If it were a third world country its currency would have plummeted 90% already. Just this week, the IMF even said that the USD was overvalued at current levels! This isn’t politics, folks. It’s math.
Inflation in the US Money Supply
All central banks print money, but it is the rate and amount of money printing in the US that has everyone’s hyperinflation alarms going off. The US Treasury holds an auction each week in which it proffers US debt instruments to potential buyers around the world. These auctions of US debt are increasing in record amounts.
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Low Global Central Bank Interest Rates
Call it “competitive debasement,” but for a multitude of reasons, most central banks around the world (except for Australia) have needed to lower their own rates to keep up with the lowering at the Fed (or they’ve undertaken other means of weakening their home currencies to protect their exports). All this means that bonds and cash don’t pay much at all the world over – so gold becomes an easy trade – some say, even the only obvious trade right now. Low rates also create asset bubbles, and gold is a smart place to be when bubbles pop.
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Low Equity Earnings
U.S. economic fundamentals are still in “show me” mode. Most profits have come from cost-cutting (much of which came in the form of layoffs). Conversely, analysts are still asking whether “growth” in the form of positive GDP numbers is sustainable without government stimulus. The positive GDP seen this past quarter in the US is largely regarded as coming from the Cash for Clunkers program and similar quantitative easing measures.
Continued US Unemployment and Layoffs
Layoffs have slowed, but they are still happening. Now they are hitting the normally defensive sectors. Johnson & Johnson and IBM last week, Microsoft and Pfizer this week all cut jobs globally. These are mammoth global companies, yet still affected by the downturn. Most people agree there cannot be a full recovery if there is no recovery at the level of employment.
Purchases By Central Banks
Just last week, India bought 200 tonnes of gold from the IMF, bringing its reserve totals up to 6%. China, too, has doubled its gold reserves over the past two years. Central banks worldwide are now net buyers of gold. This hasn’t always been the case – it’s a fairly recent event. This is a very bullish factor for gold. India’s purchase alone popped the gold price up $25 or so in a single day.
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Each day the US economy doesn’t improve, there is another small push for gold. Can you still make any money on the gold trade? Probably. Not as much as you could have made four months ago, though. But it pays to pay attention to these factors and how new developments affect the prices.
If there are signs that the US dollar might rally again, or that the Fed will raise interest rates or that the US has a plan for cleaning up its debts, then there may be some substantial downward pressure on gold. But not until then.
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{ 14 comments… read them below or add one }
Great look at gold. It will be an interesting few months, I think. It’s interesting that we’re turning back to gold as something of “value”. Of course, since all value is perception, gold could drop off if change the way we think about things, or if the U.S. takes drastic measures to make its fiat currency a little more stable.
i haven’t invested in gold but i plan to in future. This information is really useful- there are quite a few things that i did not know
thanks Kenyan. You mentioned you were concerned about inflation in a previous comment…. gold is often used precisely as a hedge against inflation.
I would be interested to hear your take on whether moving off the gold standard was a good thing or bad thing.
@Thicken – based on all I know, how could it have been a good thing? Was it not a rather unethical move? Didn’t it become the ultimate basis for subsequent growth in asset bubbles? Correct me if I’m wrong – I’d like to hear the argument for why abandoning gold backing of currencies was a good, or even the right, thing to do. Has there been more economic growth without it?
I actually don’t have an opinion either way since I am not educated enough on it. Perhaps its a future post for you?
Could be, thanks for the idea:) I’m no expert, either, but I have read about it more than a few times.
hi
just have gone through a nice piece of pure research on soaring gold prices,bravo,well in your opnion what are the chances of gold going further up and upto what limit w.r.t time line,i ve read alot on internet that this price hike is here for good and might hit 2000$ in a year or so,what do you say about that?
@JUNAID – A few analysts are certainly calling for $2000 in a year’s time. The big factor is the extent to which economic conditions remain the same. If they more or less remain the same as today (uncertain U.S. growth etc.), then to me it does seem possible we could see $2000, especially with continued central bank buying.
hi….is it still safe to invest in gold after dubai market crash,what are the chances of gold still going up…to my understanding dubai market crash means that UAE government is not buying the yellow metal,so this condition may prevail for a limited period and gold will again go up…any comments…regards…
i found following lines on the internet…..
“Dylan Grice, a strategist at major European financial services firm Societe Generale, provided an even more optimistic assessment of Investing in Gold last week.
He explained that gold prices could go as high as $6,300 per ounce, based on inflation-adjusted calculations relating to the previous gold bull market in the 1970s”
can any body explain this…???
@junaid – I’m not sure how Dubai’s recent developments will affect the gold market – if anything it seems more bullish for gold given more debt default threats. And yes, gold is still not barely at half its inflation-adjusted prices from 1980 when it was at about $2500. I haven’t yet heard any calls for $6000 gold, but who knows how that guy is making his calculations.
o kay…what would you advise to some one who wants to invest in gold today?can it be a short term or long term investment..{ i hope my silly questions are not bothering you much :-) }
BE CAREFUL GUYS ! there must be something going on with this gold thingy :)