Overview
As good as Gold, we have heard this line many times when someone speaks about something precious and pure. In the early days of America’s history every dollar bill was backed by an equal amount of gold bullion, and people or corporations could exchange their dollars for gold at face value. Hundreds of years later, gold still continues to holds value in the eye of the investor, however the US Dollar no longer holds up to the “As Good As Gold” adage, the number of dollar bills keep increasing around us, as a result of this the number of dollar bills chasing a fixed amount of gold increases driving up the price.
Events Affecting Price of Gold (GLD)
The price of gold is affected by various events and actions around the world, some of these actions and their relationship are documented in my listing below.
1. As “Amount of money in circulation” goes up so does the value of Gold.
Governments around the world are printing their currencies at a break-neck speed, countries of the west are printing money to avoid a recession, while the creditor countries Brazil, Russia, China, and India are printing more money just to devalue and gain a competitive export advantage.
Because of all this liquidity and excess money supply is chasing fixed gold reserves the value of Gold in US Dollars is bound to go up.
2. Hedge against catastrophic financial crises
In 2008 we witnessed a financial earthquake in New York, solid banks and investments firms started falling like a deck of cards, the ripple effects of which are still being experienced even today (Portugal, Ireland, Greece and Spain). Gold has become a source of financial refuge in such times. The move to diversify into Gold will continue to remain in place as long as financial instability continues to exist in the world.
3. US Treasury Rates – low rates support continued uptrend
As Ben Bernanke has put it “rates to remain low for an extended period of time”, when the interest rates are low, rich people, institutions, and governments tend to invest money in other resources that have to potential to generate better returns. Gold together with stock market will continue to maintain the strong uptrend as long as US interest rates remain near record 0 %.
4. Burgeoning middle class in India and China
Gold is considered very auspicious to most Indian and Chinese citizens, as the upper middle class societies in these countries grows, so will the amount of people interested in buying Gold. This will drive up the cost of gold.
5. Marriage season
The Indian marriage season is September – October is typically signifies a seasonal bull market for Gold, thus driving up prices.
6. Gold rush frenzy
Every good investment ends in a bubble that will eventually burst, just like the tulip mania, dot com boom of 2000; housing boom of 2007, gold too is currently in the early stages of a bubble. Towards the fag end of the gold bubble, we will see prices rising 5-10 percent every month for many months on end. That is the best time to jump out of the Gold market and sit on cash.
* image sourced from wikipedia
Forecasting Price of Gold in 2011
# | Event | Forecast | Effect |
1 | money supply in the world | continued uptrend expected thru Q3 of 2011 | +2 |
2 | Fear index | fear will continue to exist till mid-2011 | 0 |
3 | Interest Rates | Rates may start rising in Q3 2011 | -1 |
4 | Middle class in India & China | long term up trend will continue thru 2011 | +2 |
|
| 2011 Forecast | +3 |
In conclusion, I believe that we are in multi-year bull market for Gold, we will see a continued uptrend in Gold prices thru 2011 possible reaching at least $1800 per ounce (or at least Rs.24,000 per 10g), and I will be buying additional gold again in 2011 whenever it dips by 5-7 %.
Please leave me your comments as I would like to hear your perspective on Gold.
