Over the last few years, gold has experienced a sudden price spike, similar to what occurred in the 1980s. As of today (Nov 3, 2011), gold sits at $1762 an ounce. This is down $134 from an all-time high of $1896 (on September 2011). Experts are mixed as to whether gold is teetering on the edge of a bubble, or if it will continue to gain value in the long term. If we look at past events which contribute to increases and decreases in the price of gold, we may be able to determine its future value by examining these “predictors”.
Predictors of Gold and Precious Metal Prices
Inflation – Stimulus programs are currently propping up the economy and have been introduced in many other countries to fight the global recession. As more money is printed, paper currencies tend to be worthless. The inflation of currency makes commodities like gold and silver, real estate worth much more valuable. In this case, commodities can be seen as a hedge against the loss of value in paper currencies. The more gold becomes seen as a safe investment, the more its price will inherently rise.
Not all experts agree with the concept that inflation rates and gold prices are linked. From the ’70s to the year 2000, gold prices and inflation rates followed each other quite closely. However, during the last 10 years, the rate of inflation and gold have diverged.
Demand – Demand is growing due to higher wages in developing countries like China and India. In 2009 East Asia, India, and The Middle East accounted for over 70% of the world’s gold demand. These countries along with China are experiencing a boom in wages and changes which will lead to increased demand. The Chinese government also encourages its citizens to invest in gold and has begun allowing the import of gold from foreign markets. The high demand for gold from China and the rest of the world market exceeds the available supply.
Discovery – Gold is not being discovered through mining at the rate that it once was. The rate of discovery of new gold has consistently failed to hit expectations in recent years. Some experts believe in the theory of “peak gold”, which predicts that the rate of discovery will continue to fall as the world’s gold supplies are depleted. If discovery rates decline, prices will continue to rise.
Economic Uncertainty – Currently, the United States and many other countries are struggling to recover from a double-dip recession. The global economy has been hit hard and the EURO is teetering on the verge of collapse. This confusion and uncertainty about the economy mean investors will look to gold as a safe place to store their money. If this uncertainty remains, prices will remain high.
Crisis And Precious Metal Prices
In addition to financial difficulties, conflict continues to rage across the globe. The “Arab Spring” has changed the political landscape in the Middle East. The world is still waiting to see if the outcome will be positive or lead to more conflict. An increase in the price of oil has contributed to higher gold prices in the past. A new political order in this region will affect prices.
As the price of gold sits at $1762 an ounce, it mirrors a situation in the 1980s where gold prices hit the equivalent of what would be $2000 an ounce today. A similar spike occurred due to dramatic oil price increases, a gas shortage, unrest in the middle east, and a change of leadership in the oil-producing country of Iran.
Summary
The rate at which gold prices increase or decrease depends on a variety of factors including the state of the world economy, the wages in countries that have the highest demand for gold, volatility, and conflict in the world, and the rate of discovery of new gold. Currently, the price of this precious metal has experienced a spike that does not seem sustainable. In the long term, all the ingredients that are necessary for increasing gold prices exist. After a correction in the over-valuation of gold takes place, it will be seen as a safe place for investors to store their money. Due to this fact, I believe that gold will continue to maintain its value even if the economy becomes more prosperous.
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