Monday, July 16, 2012

Has Gold Peaked? An expert opinion

Is the gold price too high? Has gold peaked?

"I have been interested in gold, but the price is too high. What if it has reached the peak?" The gold price may actually be low compared to where it's going to be in 2012, 2015 or 2020 and beyond. There are several reasons why the gold price was undervalued in the past decades: debt was under control, so there was no need to print money (unlike today, when governments need to produce fresh money to pay back what they had borrowed). While money printing and borrowing were happening in a controlled manner, the inflation was contained. The financial markets were fairly stable and funds yielded attractive profits. Thus, safe heaven investments, such as gold, were unsought.
In addition, the Western central banks were selling large portions of their gold reserves in the expectation of a long-lasting economic boom. These sell-offs lead by the Bank of England, the International Monetary Fund and the European central banks peaked around 2000 and caused a further depression of the gold price.
But apart from the comparison to the prosperous 1990s, there is little evidence that the current gold price is too high. The purchasing power of one ounce of gold in terms of food, housing or other commodities is in line with historical records from decades and centuries ago. It suggests that gold is not expensive from the long-term perspective. Rather, the gold price is likely to keep rising due to the expected problems of the next 10 to 20 years: inflation from excessive money printing, turbulent markets caused by unstable (inflating) prices, new oil price shocks and government budgets affected by retiring Baby Boomers, and so on. 

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