The following is a guest post by Great Credit Score.
As economic uncertainty dominates the news, the price of gold continues to maintain its high price. In fact gold has spiked so significantly since the 2008 mortgage crisis that most experts think it could be looked at as nothing less than a bubble (especially in the short term). As investors worry more about the dollar, they look to gold as an asset that can maintain its value in case of a severe economic crisis. The price of gold will likely fall or rise depending on what happens in the world economy. Unfortunately we still have some tough economic situations like the European debt crisis to get through, so the price of gold may maintain its value or even rise, until we see positive trends in the economy and job growth.
[Kevin] Gold recently fell from the mid $1700s to the low $1600s after briefly touching $1900… is this pull-back a good time to add to your position, or perhaps a sign of a bubble bursting?
The Recession and Gold Prices
The recession has affected many aspects of the economy and finance including home prices, increasing consumer debt, the drop of formerly good credit numbers, and stock prices. The reason why gold prices tend to rise during these times of uncertainty is that gold is a tangible asset that is unaffected by inflation. As inflation increases, paper money is worth less, but assets like real estate and precious metals are worth more. If an investor placed all of their savings in a bank account, they would be losing net worth as inflation increases. But if they own assets like a home, the price of these assets would go up in value as more paper money is printed.
The Case For The Gold Bubble
Gold prices in 1980 spiked up to $850 an ounce from just over $200 an ounce the previous year. If adjusted for inflation, these prices would be over $2000 an ounce. Two years later (1982), gold lost more than half of its value and plunged to the mid four hundreds.
[Kevin] There are some who believe that this time is different than the 80s. I would recommend searching out the gold posts on my site, or researching posts written by FOFOA.
So what happened to make gold prices rise so significantly at this time?
Certain events took place including double digit inflation rates, an extreme spike in oil prices, the Iranian revolution, and war in Afghanistan with the former Soviet Union. A cluster of negative events occurred simultaneously and uncertainty about the future was high. There is definitely a parallel between what happened in 1980 and what is happening right now. Wars, high gas prices, and instability in the middle east all created a climate of fear which led to a dramatic increase in the price of gold.
Another reason that gold would be seen as a bubble, is that the price of any asset cannot continue to increase indefinitely. Bubbles, crashes, and re-adjustments are a constant with all assets. A bad economy and uncertainty are driving up the prices, so if world events improve, it could lead to a dramatic drop in prices.
The Case For $2000+ an Ounce Gold
The world recession has come as a wake up call to many investors and financial institutions around the world. Due to dramatic increase in gold prices as of late, this metal may start to be seen as a safer place to park large chunks of money compared to the stock market (which has been especially volatile as of late). It could cause investors to begin seeing gold as a type of currency. They may choose to keep their money in gold as an alternative to the Dollar or the Euro.
Some economists see the U.S. entering a period of hyperinflation. As the economy continues to perform poorly and government debt continues to rise, money may be printed to ease the economic problems. If the value of paper currency falls, then the value of commodities like gold will rise even further. Gold can be purchased as a hedge to protect one’s money against inflation.
Gold prices can be very difficult to forecast because they are reflected in unpredictable world events. I personally think gold is a bubble that will pop when the U.S. economy begins to grow again. Politicians are starting to realize that our national debt is a serious issue and we cannot continue mindlessly on the path we currently are on. If politicians are able to make serious cuts in spending and job growth starts to go in a positive direction, i think gold prices will start to fall. The events that we are going through now mimic many of the world problems that we saw in 1980. I still think that gold prices will hold for a few coming years, but it will drop once this difficult period comes to an end.
Ross maintains the financial website Great Credit Score. It focuses on topics like debt and credit, but will likely start to take subjects like the stock and commodities market.