Updated: 4/21/2011 6:35 PM ET|
Why gold could hit $5,000
Fears of inflation and global turmoil have sent precious metals surging, with gold trading at all-time highs above $1,500 an ounce. How much further can it climb?
With turmoil overseas and energy prices on the rise, investors are worried. They're worried about geopolitical risk. They're worried about a falling dollar. And they're worried about inflation becoming entrenched as the Federal Reserve continues to administer its cheap-money medicine despite signs of inflation.
As a result, gold is on the move again. For much of last year, gold moved higher over worries about Europe's debt crisis and a "double dip" recession in the United States. Prices fell into a funk in the fall, though.
Now, a new set of concerns has gripped the hearts and minds of investors. Fear has returned.
And the yellow metal keeps hitting new highs, closing on April 21 at $1,503.80 an ounce. (Click for the latest prices on gold futures (-GC).)
So how high can it go?
Believe it or not, some analysts are calling for prices to move close to $5,000 -- not immediately, but sooner than you may think. Here's why, and a few ways to play gold's upward.
The road to $5,000 gold
This is because, according to the folks at Standard Chartered Bank, gold is moving into a new "super-cycle" as a number of structural factors -- including consumer demand from Asia and tepid growth in supply -- combine to push prices higher. The team, led by Dan Smith, is looking for prices of $2,107 an ounce in 2014 as its base forecast.
The team's members see the potential for much more. In their words, "statistical modeling suggests a possible 'super-bull' scenario of gold prices rallying up to $4,869 in nominal terms by 2020."
It's all about supply and demand.
The driver is increased wealth in Asia. The evidence shows a strong relationship between rising incomes in places like China and India and increased gold demand. Much of this is cultural, with gold holding a place of special religious reverence.
Data from the Shanghai Gold Exchange show that China's gold imports reached 230 tons in the first 10 months of 2010. But in only the first two months of 2011, industry experts cited by Standard Chartered estimate that imports hit 220 tons. No doubt, Beijing's somewhat weak-handed efforts to fight inflation are contributing to the rise, as people look to protect their burgeoning wealth from the ravages of rising prices.
David Davis, an old-hand mining engineer in South Africa who tracks precious metals for SBG Securities, notes that even poor peasant farmers in India, if the monsoons are good and the crops are bountiful, will splurge on a grab of gold. These people may not understand the value of interest-rate compounding or portfolio diversification, but they know that gold is an ancient and universally accepted store of value.
Indeed, the "super-bull" scenario depends on China and India: This outlook assumes that the average income per head in China and India reaches 30% of the U.S. level by 2030 -- up from 2% of the U.S. level in the 1980s and around 6% now. This seems very likely. Standard Chartered is looking for India alone to create nearly 500 million new manufacturing and service jobs over the next 20 years -- jobs that will expand India's middle class from 10% of the population today to 90% over the period.
The inflation fight
It won't be a straight shot to $5,000 an ounce, however. That's because history shows that while gold tends to rally in the period leading up to an interest-rate hike, it stalls a couple of months before the actual move higher.
We're in such a period now. The European Central Bank became the first rich-world monetary authority to tighten policy last week. In the U.S., the Federal Reserve's $600 billion "QE2" program to push money into the economy is set to end in just two months, and near-zero interest rates appear unlikely to last.
That could result in some volatility for gold over the next few months as the market waits to see how aggressively ECB President Jean-Claude Trichet and Fed Chairman Ben Bernanke attack inflation. Gold, of course, is the traditional hedge against inflation for investors. And right now, the inflation threat continues to grow.
"Real" inflation-adjusted interest rates are negative since inflation is currently running higher than interest rates. The two-year Treasury yield stands at 0.85% while consumer price inflation is running at 2.2%. The negative 1.45% real yield is a sign of extremely cheap cash and bubbling pressure on prices. And it's forcing investors out of cash and into assets that will hold their purchasing power in a negative rate environment -- assets such as gold.
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$5,000 sounds high, But I had relatives in Germany that wallpapered their walls with MILLION MARK NOTES.
There is a reason why big Gov't types hate the Gold standard - you can't print and spend a gold coin. What you spend has to be REAL money. Either you take it from someone through taxation, or you borrow it from an actual outside entity (you cannot borrow from yourself).
They hate it because it puts the books right in front of the people. No fuzzy math of Quantitative easing.
You spend $3.6 TRILLION IN A YEAR - YOU HAVE TO HAVE $3.6 TRILLION. If you are short $1.6 TRILLION, you borrow it or tax it.
But the big Gov't types know if you see it clearly, you will reject big Gov't.
No mystery inflation that the Gov't won't admit exists happens when you can't print money out of thin air.
Saying that gold is a better store of value than currency is a truism. Heck, chicken manure is probably better at storing value than currency!
The question is, is gold better than copper, oil or stock indices at storing value? Over the long term, who knows. My take is that nothing beats educating one’s intelligence and running a successful business. The gold that shines the most is the one we carry in our brains.
Not likely in my books....
I disagree with your conclusion. Any leadership can create as many jobs as they want. Only the smart ones act to increase jobs, wages, and the overall standard of living of its people. They don't do it for humane reasons, but to have a larger base for taxation. The American leadership should take an economic lesson from India and China.
One of Chinas newer Domestic policies is to encourage and help enable every citizen to own gold. The US Federal Government, Corporate America, and our Elite only have two things in mind...how to get the last worthless nickels out of our pockets, and keep us arguing amongst ourselves.
It's one thing to pick apples from the tree in your back yard and bring them home by the bushel. It's quite another thing to have to travel a long distance to do the same. It's the "distance" and the "quality" of oil feedstock that is changing rapidly. Click to see my thoughts on the gold in Fort Knox!
As for: " $8,000 an ounce. This is the price at which the U.S. monetary base, which has jumped from around $800 billion before the financial crisis to more than $2.4 trillion now, would be fully backed by available gold."
WHAT gold? Fort Knox has not been audited since 1953! And from a QA/QC POV the audit was a farce. In 1974 a "tour" for politicians "audit" was held, that was simply a show--not one bar was assayed.
The fact is we have no idea as to how many .9999 or .995 equivalent ounces exist. Nobody knows how many millions or tens of millions (or hundreds) of ounces were "loaned" overseas. Nobody has accurate measures of quality. Most of the bars came from melted coin. Commercial Comex "good delivery bars" are .9999, though between nations .995 are acceptable.
Despite many repeated efforts to obtain a quality audit--Not ONE has been performed. Ask yourself why. Sure, all the gold is there. And the budget will be cut by 38 billion this year. And Obama will cut 4 trillion from the deficit. I think not.
"An analysis by the Congressional Budget Office has concluded the real savings from the plan may only be $352 million—which would represent one-one hundredth of the original promise of $38 billion." No links allowed, just google it.
sorry but I don't think we're in Kansas anymore.jjj
With the reduction of Gold output, and the increase of Gold prices, buying an ETF in Gold would be a Bernie Madoff move. How can we buy something that isn't there? Ask if you can take physical control of your Gold that you would buy. They would look at you like you were from another planet.
Gold may go to $5,000 but someone is going to lose and lose big at some point. Gold is shiny, but it will lack luster when you find out you are buying paper.
Diversifying with some gold and silver may not be a bad idea but also investing in some guns and ammo is also good insurance. Basic staple goods and non perishables may also be a bit of insurance should our currency suffer a near collapse or a complete one. If it ever gets to that point, your basic needs may not be replaced by just owning gold and silver alone to keep you alive, fed and warm. Being prepared for the worst using common sense logic may well come in handy for some tough times ahead.
This story reminds me of the stories that always come out when the price of gas gets rediculous. Every time the price of gas goes WAY up because the investors want to make a lot of money, then a story comes out about "What if gas were $10.00 per gallon?" That story is put out for two reasons. First to keep people from getting so upset about being bent over because of greedy people. Second is so that the small investors will buy the oil/gas at the higher unjustifiable prices that the speculators have driven it to and they don't want to lose on the impending drop.
Same with gold. Oh, darn, production has been dropping. Yeah right. With gold selling at $1500 per ounce, after dropping down to $240 at the end of Clinton's presidency, you can bet the mining companies are scaling way back.
There's another similar story going around. How inflation is only 1% or 2% when it's actually at least ten times that. That's so the Government doesn't have to give colas to the elderly and disabled. Makes great sense too. Look how much better the economy is when you give the money to the wealthy who take it and spend it elsewhere, or save it than it would be if you gave it to the people who are getting poorer and poorer and are spending less and less.
Typical BS. If Uncle Sam is fixing something, that means it's going to get a lot worse.
"Standard Chartered is looking for India alone to create nearly 500 million new manufacturing and service jobs over the next 20 years -- jobs that will expand India's middle class from 10% of the population today to 90% over the period."
To project 80% of India's population to move up to middle-class in two decades seems very unlikely.
I'll just keep investing in lead.....with copper jackets and hollow points.
And as for those folks that can't seem to sell their gold or silver, I have somewhere 5 miles from where I live that pays me spot price on the spot too! Almost $44 per ounce for silver today, and there are still a couple of months left for the QE2 to run too, not including what happens to the Dollar as our credit keeps getting downgraded and we quite possibly lose world reserve trading currency status too!
Refuse to increase the debt limit? That's a good one (for me) and for anyone else holding lots of precious metals too!
Speaking of gold mining, there are 10s of thousands of old gold mines in the State that I live in, and plenty of them have reopened in the last few years too. If you want to try something exciting, try panning for gold at the base of old gold mine tailings piles, where the rain has washed the heavier particles downhill. A friend of mine just brought home a medicine jar full of flakes home from a hard half a day's work up in our mountains here, that the old miners in the 1800s threw away because it was too small.
This guy sucks. I say this every time he "publishes" on msn.com, but I'll say it again - this same guy said the price of a barrel of oil would be between $40 and $140 (3 years) ago, basically saying that there's a good chance you friends will be between 5' and 7' tall. Now, gold *could* go to $5,000 per ounce? Notice he doesn't say when - because he has no idea. "Real" interest rates are negative? Uh, the T-bill rate is not really an interest rate to go off of because that is a government "bond" rate and has nothing to do with bank lending (prime rate and consumer rates do). Theoretically, you could have a scenario where "real" rates would be negative and things would be peachy - that would be a severely robust economy and a basically not-for-profit government.
Anyway, why msn.com continues to publish this guy is beyond me. You know, if you make enough wild and crazy predictions, one of them will come true. Let's not forget how often this guy does that.
Dotcom bubble, Realestate bubble, Gold bubble.
Without a doubt GOLD will be the next big CRASH. With higher income earners thinking Gold is a safe heaven, they will find themselves holding the bag. This pattern of looking for a safe heaven for your money at $1500 an ounce, not to mention the idea of a few thousand dollar an ounce will destroy a lot of innocent peoples net worth....be very very careful...leave the game and PR to investors who want to play the game and create hype.
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