Will gold prices keep rising?
Gold prices have soared in recent weeks, but will the rise continue?
Gold futures dropped to $1,161 a ounce Friday after an optimistic job market report perked investor confidence.
Even with that dip, though, many analysts believe the price of gold, which hit a record of $1,226 an ounce this week, will continue to rise. Some even predict gold could hit up to $5,000 an ounce.
As the hype around gold continues there are strong reminders to remember 1980. That January, gold hit the astounding price of $850 an ounce, up from about $250 an ounce in May '79. People were hocking gold coins and melting down their grandmother's gold wedding bands.
However, after gold spiked at $850 on Jan. 21, 1980, it crashed back down around $600 weeks later, and the price of gold remained steady in the $300-$400 range for many years, hitting a decade low of $255 an ounce in April 2001. It’s up about 355% since then.
The same inflation fears that drove gold prices higher in the 1970s may be at work today, but some analysts say things are different than they were 20 years ago. It's true that historically gold has been used as a hedge against inflation. But this relationship may have changed over the past year. As the price of gold has risen this year, inflation has moved in the opposite direction. In 1980, inflation was already rampant when investors started buying up gold in the late 1970s. Today, inflation has yet to rear its head. When it does, Lou Grasso, a trader with Millenium Futures, predicts that there will be an initial spike to $1,500 to $1,800, but that from there the price of gold will most likely back off.
Two other current trends support some analysts’ predictions the price of gold will not dip too low anytime soon. The combination of a weak U.S. dollar and many central banks’ low interest rates have encouraged banks to use gold as currency. Central banks in countries like China and Russia are are using the precious metal as a backup reserve currency. The more of this precious metal these banks accumulate, the more they are going to have to support its price.
It can also be argued that the price of gold is reinforced by that simple lessons from Economics 101;: supply and demand. The cost of mining gold has gone up, and the production of gold is declining.
Analysts argue that a bubble has not been created as the price of gold isn't really even that high right now. Adjusting for inflation, gold's 1980 $850-an-ounce record was actually $2,163 an ounce in 2009 prices. Peter Schiff, president of Euro Pacific Capital, says today's price of $1,200 isn't that expensive for gold considering all the money the United States and central banks around the world have created and are going to create. Schiff thinks gold can eventually beat its 1980 record, adjusted for inflation, rising as high as $5,000. That may take a few years, he adds.
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