Five Reasons Gold Bullion Could Reach $1000

The current state of the U.S. dollar does not bode well for the greenback. This month, the dollar depreciated significantly, falling to its lowest value against the yen in the last two and a half years. Against the Swiss franc, the U.S. dollar has fallen to a historical low; the downward push was prompted by continuing signs of American economic woes, including the world’s largest finance broker, Merrill Lynch (MER), reporting a $16.7 billion dollar loss from the plummet of sub-prime mortgages – the worst quarter in its history.

With the value of the American paper continuing its decline, many investors are looking elsewhere to invest their funds. Considering that gold and the U.S. dollar move inversely in value, the question now begs, will gold prices continue its tear upwards, potentially hitting $2000 as the next milestone? The popularity of gold rises during economic and political turbulence, satisfying investors’ psychological needs of an inherently valuable, safe asset.

Indicators for Rising Gold Prices

It is estimated that the price of gold that hit $800 during the 1980s would have translated to $2200 in current prices. Indeed, comparing year to year growth, gold has climbed 30% since last year. Barclays Capital forecast that gold may hit $1,000 during 2008 – and Goldman (GS), Citigroup (C), Credit Suisse (CS), and UBS (UBS) agree.

Although gold crossed $900 this week, hitting $1000 may take an extended period of time. With that said, the indicators are pointing towards a rise in bullion. Thus, the possibility is certainly there.

Oil Prices: Oil prices have already scaled the level of $100 a barrel. Will we see $200? That is absolutely possible. In an era of extreme uncertainty and shortages, oil has a strong possibility of escalation. Bullion prices move in-line with oil because gold is considered to be a valuable asset hedge against inflation.

Weakening Dollar: Although the value of dollar is no longer linked with that of gold, investors take refuge in gold on any weakening of the currency. As the dollar goes further down, investors will hedge gold in order to preserve their investments – bullion is the ideal alternative asset that has inherent built-in value.

Continuing Strong Demand: Demand for gold will continue to pour in from Asian countries, especially China. Historically, and in present times, Asian countries have been heavy consumers of bullion. Since supplies are short, strong demand will push up gold prices. At present, there is simply more demand than the supply.

Increasing Market Volatility: In the event of increasing market volatility, gold will continue to rise, as bullion is considered a safe-haven investment. Instead of putting their cash to the sidelines, investors place it into gold.

Inflationary Pressures/Federal Reserve Movements: When inflation rises, so do the prices of gold. Continuing commodity prices will push up the prices of gold. Expect actions taken by the Federal Reserve to significantly impact the price of gold, as investors closely watch Bernanke’s words and motions.

The Golden Dragon: Booming Asian Demand for Bullion

China has now entered into the arena of futures trading with the opening of The Shanghai Futures Exchange. Immediately upon the launch of the exchange last week, gold soared, hitting the daily 10% limit. The activity on the new exchange will further boost the demand for gold for the purposes of hedging.

The Chinese “gold rush” also extends into the consumer levels. For example, Beijing’s Caishikou Department Store, which is a very popular physical gold dealer, has experienced its sales of gold products increasing more than 50%, hitting $2.38 billion RMB in 2007.

Within economic and financial circles, people are debating whether gold may very well become the future currency, replacing existing paper currencies. Whereas the application of gold as a tangible currency is far-fetched, bullion as the underlying medium of international investment and exchange is quickly become a reality.

In China, the demand for gold continues its tear upwards. Zhongjin Gold Corporation Ltd., a leading manufacturer of gold products, reported month-to-month sales growing 50% since July of 2007.

In addition, Chinese bank accounts allow their customers to utilize their savings and checking accounts to buy and sell gold virtually at set market prices, and this ability has grown significantly in popularity. According to the Bank of China, its Shanghai branch’s transactional volume of this so-called “paper gold” has grown 30% since the stagnant days of gold prices.

Considering all of these factors, gold commodities may be a smart investment for those investors looking to stand on the side, allowing the equities markets to play the uncertainty out in 2008. Investors may also want to consider investing in gold stocks, especially those which have not proportionately risen with the price of gold per ounce or may be on the threshold of more gold discoveries.

Main Precautions

With all of the significant indicators in mind, gold may be due for a short breather. There are resistance levels built in at $850 and $800 an ounce, and investors can expect the price to bounce at those levels. Waiting for gold prices to take a short downward jaunt, as well as monitoring Bernanke’s actions, will give investors an opportunity to buy at lower prices – which makes the ride up towards $1000 even more profitable.

Comments

[Lester]

Of course the Chinese people don't trust paper money. Kublai Khan taught them that lesson hundreds of years ago!

[growthvalue]

IGRU.PK is having a investor call next week....should shed light on this gem set to double maybe more