Over a year ago, on May 6, 2010, this blog launched with a first post on the attractiveness of gold as an investment. On that day the price of gold was just under $1200/oz, and as it became clear that the Federal Reserve was about to embark on another large round of money printing, which later came to be known as QE2, I felt compelled to grab the keyboard and start typing (see articles tagged 'gold' on my blog and on Seeking Alpha for further reference).
During this time it has been amusing to watch the professional punditry drone on about a "gold bubble" and observe various blogger bets about how gold's run couldn't last. The biggest amusement of all, however, has been the disparaging remarks from those such as Berkshire Hathaway's Charlie Munger, who belongs to a group I've taken to calling the 'gold haters'.
Suggestions from credible policymakers, such as the World Bank's Robert Zoellick advocating a return to the gold standard, have lit a fire under the barbarous relic's price this past year. Today, with gold pressing above $1700, or nearly 50% higher in just over a year, I can't help but comment on how we've heard nary a peep of late from the anti-gold crowd.
Where to from here? As long as three key fundamental forces persist, the rise in the price of gold will continue unabated. Those forces are:
- Low interest rates, a hallmark of the current program of financial repression, which is only just getting started and should extend for many years to come.
- Ongoing central bank purchases of gold in 2011 by countries such as South Korea, Thailand, Russia, etc..
- More money printing, which we've seen in spades of late with Italian and Spanish bond buying, Bank of Japan and Swiss National Bank currency intervention, and the Fed's rumored QE3.
Translated into an actionable forecast, the ongoing economic and global financial system weakness should motivate central bankers to continue these practices through the remainder of this year and well into 2012. This time-frame should allow ample room for gold to continue to appreciate past $2,000/oz., and perhaps allowing its price approach the all-time inflation adjusted high of approximately $2,200/oz.
In short, policymakers seem unconcerned with the prospect of gold's rise as a result of attempts to stabilize and restart growth in the economy. And they may in fact welcome the rise in the price of gold as a leading indicator that inflation expectations (seen as a positive by central bankers) are once again out in front of deflationary concerns (seen as a negative by central bankers).
The bottom line: as long as the price of crucial economic commodities, such as oil, do not rise in lock-step with gold, and further fiscal stimulus remains off-the-table, then there is little in the way of incentives for central bankers to rein in their money printing.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.