The Long Case for Gold

Includes: GLD, IAU
by: Jose Paul Martin

This year, expect to see a rise in gold prices. Gold has always been a universal currency. Go to any country and it will more or less have the same value. This year started with gold prices touching a low of $605 and reaching a high of $689 last week.

If you got the hint from my valentine message and you bought some, you would have seen a small margin within a short period of time.

But is gold slated to go higher? A survey of well known market analysts have predicted gold price to reach as high as $850 this year. With a consensus (median) that it would reach as high as $750, it’s still worth investing. As the saying goes, gold is always meant to be bought.

Gold Dynamics, Statistics and Fanatics

  • Gold generally rises on speculation that a decline in the dollar will spur demand for an alternative investment. (And recently, we have seen a decline in the dollar).
  • Rising oil prices renew the appeal of the precious metal amongst investors as a hedge against inflation. Gold futures surged to $873 in 1980, when a jump in the cost of oil led to a 13 percent annual rise in U.S. consumer prices.
  • Merrill Lynch forecast that gold may rise to $725 by 2010 because of rising demand from China (and perhaps India too!).
  • “Everybody thinks inflation is going to stay at two percent, I don’t believe it, there has been way too much money printing in the world for that to happen.” - unknown.
  • During the last decade, many central banks have been reducing the proportion of gold held as part of their currency reserves. This is probably a reasonable, sound move in keeping with modern theories of currency and foreign exchange management, after all most currencies are now token currencies, their value being related more to the general perception of their worth, dictated by trade imbalances and supply and demand. Whether it proves to be a completely sound principle will probably not be fully known for another fifty years or so.
  • The World Gold Council has consistently argued against Central bank sell-offs, but as it is financed by the gold producers, this is only to be expected. The effect of the Central bank sales has been to significantly increase the supply to the market, and it has understandably has the effect of reducing gold prices. Within the next few years, we believe that Central bank sales will slow down, perhaps stop, and it is entirely possible that they may eventually return as net gold buyers, particularly on any weakness in the gold price. Obviously the reduction or cessation of a flow of Central banks gold onto the market will exert an upward pressure on prices.
  • As the world demand for gold has absorbed quite large quantities of Central banks gold stocks over the past decade, with only a fairly small downward effect on prices, gold prices are more likely to increase over the next few years than to decrease. Certainly the upside potential must now be considerably stronger than the downside potential.
  • And now for some reality:

  • Production of gold peaked in 2001 and has been flat since.
  • Central Banks are capped by the Gold Agreement. If dollar heavy central banks such as China’s starts to sell more dollars for euros… then you know what happens.
  • Dollar weakness may continue for the next year.
  • Jewelery demand will start soaring again.
  • Mines are continuing to reduce the size of their hedges.
  • Gold ETFs have continued to build - a proof of the investment demand. If you are in India, there is the Benchmark Fund Gold ETF option.
  • So while gold production remains flat, and the central banks have stopped selling and increasing demand for gold for jewelery from India and China and a weakening dollar - there seems like only one thing to do: BUY GOLD!

    P.S . To read more interesting things about gold, read the following article by James Turk, the founder of GoldMoney - 8 Things Everyone Should Know About Gold. Also, watch this clip on Gold Rush 21, to learn about this precious metal aka currency.

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