12/20/2011 12:08 PM ET|
Will gold hit new highs in 2012?
The search for safe havens pushed up gold prices in 2011, and they were held aloft by fears about inflation. But there are signs of a bubble.
There were plenty of fireworks for gold this year, not the least of which were provided by record prices. The London fixed price of gold hit $1,895 twice, in early September, and around the same time, spot gold prices for immediate settlement, also known as gold futures, briefly cruised to $1,916 per ounce.
Investors who bought gold in 2011 were richly rewarded. There have been few periods in which gold's value moved down instead of up. Year to date, the price of the precious metal has climbed about 25%.
But gold investors typically are less concerned with the past than they are curious about the future. Specifically, what will 2012 hold for investors in precious metals and other commodities?
In a nutshell, it should be more of the same, with commodity prices lifted by strong demand from risk-averse investors, the prospect of inflation and hopes that gold prices will hit a record.
Let's take a look at these three issues in more detail, and consider the best ways to profit from these factors.
The fear factor
The correlation between rising gold prices and rising market uncertainty is clear. Gold's appeal rises when people are unwilling to take risk in the stock market or fear political and economic shenanigans are devaluing paper money.
When you are more concerned with finding a place to store your money safely than growing it aggressively, gold is your fallback option.
Look at a history of gold prices and you'll see that the biggest rises came amid some of the biggest periods of uncertainty. Adjusted for inflation, the real record price for gold is roughly $2,500 in today's dollars, based on peak levels of the precious metal in 1980, when the Cold War was raging, inflation was sky high, the savings-and-loan crisis was heating up and expensive oil threatened the global economy.
The reasoning is simple: Gold has been valuable since the days of the pharaohs and will remain valuable as long as it is a rare commodity.
What uncertainties lie ahead? On the short list are the ever-raging eurozone debt crisis, the prospect of a debt crisis and further credit downgrades in the United States, persistently high unemployment, geopolitical unrest as a result of the "Arab Spring" and the turmoil of the 2012 presidential elections.
Seems like fear will be in favor in 2012, which bodes well for defensive investment strategies and gold investors.
Because of monetary policies in the United States, including quantitative easing and ultralow interest rates, the inflationary picture is looking ugly to many investors.
Here are some headlines to chew over:
- In November, the average cost of Thanksgiving dinner jumped by 13% over the previous year.
- The annual inflation rate peaked at a red-hot 3.9% this fall, and it has since cooled to "only" about 3.5%.
- Many experts, including renowned Quantum Fund founder Jim Rogers, criticize inflation methodology, saying it paints a rosier picture in order to protect politicians. If Rogers' criticism is valid, the inflation outlook is even more disturbing than the numbers suggest.
The biggest fear during the financial crisis was a Japan-style deflationary spiral, where falling prices lead to decreased demand, which leads to falling prices and so on. The United States has tried to inflate its way out of such a disaster. It worked. But now we are left with the hangover of inflation, and that is going to take time, policies and patience to resolve.
In the meantime, buy gold.
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We have NOT had deflation. Are you another GWH Bush, who has never been in a supermarket? The necessaries of life, food, utilities, gasoline, have gone through the roof in the last 3 years. The real cost of living for the average family has sky-rocketed. Electronics and technology have deflated, but those costs are largely discretionary, not necessary, expenditures.
Gold will continue to do well as long as interest rates are kept artificially depressed. The absence of a dividend becomes less of a consideration when interest rates are so manipulated (downward).
This all depends on your timeline.
In the short term, it's only investor sentiment about inflation and devaluation that is driving gold up.
In actual reality, 2000-2010 had standard inflation in most developed economies. The dollar dropped about 30% from 2000-2008, but since then has been up in actual value globally. Of course, that's reality.
So how does gold do a 600% increase given a 30% drop in value of the currency it's priced in?
And of course, reality is that despite low interest rates, there isn't much inflation, and there currently isn't much devaluation of the currency its priced in. Since 2008 inflation hasn't been high (anyone considering 4% high needs to get checked, that's tame compared to a lot of places), and dollar has actually appreciated against currency baskets.
So again, how did it get from 700 to 1900 during that time?
In my mind it's not the interest rates, just mass perception in those buyers in equity markets. And ETFs are having a huge impact on the value.
Inflation, on the other hand, becomes more of a consideration because artificially low interest rates will not keep it in check. Aside from raising rates(or stopping the printing press), I don't know of any other way to effectively fight inflation.
Problem is most of what they are doing interest wise isn't that inflationary. Because none of that is going into wages, housing, and consumption.
And if you don't believe we are experiencing inflation - well I just don't know what to say. I think the "official" rate is around 3-4%. So you can either believe the governments stats - or your own lying eyes.
I calculate mine all the time. It's been mild.
If you consider housing inflation (which is completely non-existent), food which is mild, energy which has been around 5% on gas, but much less on the electricity side. In fact, negative if you are using nat gas or coal.
Commodities have plummeted this year across the board. Cotton, Copper, etc. The only one that has been sort of immune is oil.
Don't get me wrong. My average of 3-4% is higher than I'd like, but it could be the 10, 12, 15% that's going on in Brazil, India, China.
If interest rates are allowed to rise to a "free market" level, and/or our government gets some fiscal and budgetary sanity - gold will suffer, probably very badly. Otherwise, it will do just fine - and maybe better than fine. I personally believe gold (and silver) should be a core holding of 5-10% of one's portfolio.
I'd actually agree on the 5-10% level.
At least until we wake up in a world where the political elite act honestly and honorably concerning our fiat currency. When that happens, you can sell all your gold, buy some ice skates, and go skating in a hell that's frozen over.
All currencies (including when you try to use physical substitutes, gold, tulips, trinkets, etc) are fiat. The only actual value they have is the belief that they have value.
One could argue gold offers a variety of unique properties as an element and is relatively scarce, thus there's something possibly distinguishing it. However, as an actual currency it's also fiat.
A) because the only way most people can actually use it is converting it to dollars in paper markets
B) As physical coinage people would only give you what they value the gold to be
Ekonman,We have NOT had deflation. Are you another GWH Bush, who has never been in a supermarket? The necessaries of life, food, utilities, gasoline, have gone through the roof in the last 3 years. The real cost of living for the average family has sky-rocketed.
3 years? I guess if that's your specific measurement it will be true for oil/gas. But only because oil peaked in July 2008 and proceeded to crater. If you look back to 2007, the inflation on that is something like 6%. While not ideal, it's not as high as the hyperbole that surrounds it.
And is in fact necessary in order to drive more supply globally. As is happening. The fact that oil is 80+ a barrel now as normal has allowed the development of the Canadian oil sands, the shales fields, etc and has physically increased domestic supply that has been in decline since the late 70s.
My nat gas electricity is cheaper than ever. Thanks to a glut of supply of natural gas domestically.
Food has gone up. That is true. Of course, that's due to rising global demand of corn, wheat, and other products that are necessary to produce more protien diets for that rising global demand. But, considering the costs of bushels of corn, wheat, soybeans, etc, etc have all gone up 2X, 3X, etc in the last 5 or so years, the passed cost thru the supermarket has not been that extreme.
The real issue is a lack of wage increases despite domestic earnings increases for a lot of companies.
Yamantic you are an uneducated individual! There has been a "gold rush" in Mongolia ever siince Hugo Dummett discovered the Oly Tolgoi deposit more than 15 years ago. Large numbers of mostly Canadian Juniors have been combing the country looking for the next one. Read the "Northern Miner" , and you will know there is another "gold rush" going on in both Alaska and the Yukon. This year there were over 140 companies exploring and drilling in the Yukon looking for the source of the gold that caused the Klondike "rush" over 100 years ago.
There are only 2 ways to make a profit in gold investment. One is via the Futures market, betting if the short term price wil either rise or fall. The other is to literally find a gold deposit and mine it, or else sell it to a company who will.
Only fools buy gold at todays prices and hope to make money on their purchase when they sell it.
See a lot of misleading comments in this article and also the comments below.
1) Saying gold is an "investment" because you can invest in it is just a little too much. So, what you mean mr. commentor is if we invest in gold it can pay returns. Not so much. Since gold doesn't sport any dividend. In which case, you mean it can only provide capital gains.
2) Comparing it to other assets is also not right. The very fact that gold is *much* more speculative than oil should tell anyone a lot about it. And of course, all those other things have physical demand that is partly responsible for the pricing.
While oil might be driven some by fear (and rightfully so, what if Iran creates a mess, what if a BP well explodes, etc, etc) and then some more because of speculation. There's a real fact that supply and demand are very close and finding easily accesible oil is not happening so much.
Gold on the other hand, is almost entirely speculation. 70-80% of the price is about investor "feeling" - in other words, there is no real reason for what it is doing and that can change. If gold falls out of favor, it will plummet. As happened in the 1980s.
3) If one looks at a long term historical chart of gold from 1770-2011 it's easy to see everytime gold spikes above its long term trend line, it falls back. Long term, it simply appreciates for inflation and that's it.
There are unmined, but deliniated gold deposits around the planet totalling around 100 million new ounces. The Oyu Tolgoi Deposit in Mongolia contains 45 million ounces of gold and 79 billion pounds of copper!
There is another in British Columbia called Brucejack, that contains over 31 million ounces to date, with more likely to be found! Donlin Creek in Alaska holds around another 20 million ounces.
To say that gold is rare is a misnomer. And to you Ouzzy 88, a lot HAS been discovered and more is being discovered every day.
But, it is finite as is every other commodity on the planet.
Fresh water is far more scarse and precious than gold. Only 1% of the water on the planet is fit to drink. It is held in glaciers, lakes, rivers, underground acquifers, as well as in the clouds in our atmosphere.
I have mined gold for nearly 40 years and I have never seen a gold mining operation that does not pollute water.
You readers decide which is more valuable.
"In the meantime, buy gold."
Spoken like a true 1% PIG feeder who probably overbought his clientele into gold and gold stocks and is now taking a bath because it has dropped 15%+ in the last couple of months, and the pigs are waiting at the money trough to be fed, and there is nothing there.
Buy gold. yeah, whatever.
Investors who bought gold in 2011 were richly rewarded.
Really? The investors who bought gold in 2010 were rewarded (provided they held on to it). All those who bought at 1800+ this year took a pretty serious bath.
My guess is that Beanie Babies will outperform gold next year. They certainly have the last few months. Gold is up 400% in the last 6 years or so. Meanwhile, we've pretty much had deflation - certainly not anything resembling serious inflation. Suppose we have a few years of inflation, say, 5-10% worth. Gold will still have inflated far more than the dollar. Whyever would one expect the gold bubble to grow?
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