The price of gold has some investors shouting, "can you believe it?" Gold is trading close to $1,540 an ounce, 24% above the June 30, 2010 price of $1,244 an ounce and not far off the record high of $1,575 an ounce attained in early May. The big question on many peoples' minds at this point: Will gold get back to record levels and go on to achieve even greater heights?
TUTORIAL: Everything You Need To Know About Gold
It's certainly possible, especially after all the disappointing economic news we've heard recently. Only 54,000 new jobs were added and unemployment inched back up to 9.1% in May - and those are just the sorts of things that push gold prices higher. They make investors want to put their money into something that they feel can shield them from a worsening economy - like gold. There are plenty of other reasons the "yellow metal" could soar; here are six of them.
Stocks Have Been on a Losing Streak
Since peaking at 12,811 in late April, the Dow Jones Industrial Average (DJIA) has fallen nearly 6%. The Standard & Poors 500, a much broader measure of stock market performance, has dipped more than 6.5% during that time, from a peak of 1,364. The recent slide in stocks may be big enough to trigger painful memories of the financial crisis that prompt investors to buy more gold for its perceived safety.
The Dollar Isn't At Its Best
The dollar has been on a losing streak, just like stocks. Since peaking at just over 86 in late June 2010, the U.S. dollar index - which measures the strength of the dollar against a basket of other currencies - has fallen to just below 74. That's nearly a 14% decline. Investors have always viewed gold as a hedge against a falling dollar, and there's no reason to believe they won't this time around. (For more, see Profiting From A Weak U.S. Dollar.)
High Inflation May Be Just Around the Corner
As you may know, the Federal Reserve pumped large amounts of new money into the financial system to stimulate the economy during and after the financial crisis. Such a dramatic increase in the money supply has historically triggered high inflation by rapidly devaluing the dollar. Many economy watchers are worried high inflation may soon be upon us again due to the latest stimulus program. If they're right, investors seeking an inflation hedge will flock to gold and the price will skyrocket.
Global Demand for Gold Is High
Private investors in foreign countries have long been hoarding gold, and they'll probably keep buying large amounts. China is just one example. According to Reuters, "Demand in China for physical gold and gold-related investments is growing at an 'explosive' pace and its appetite for the yellow metal is poised to remain robust amid inflation concerns."
Indeed, demand in China has grown by double digits for the past 10 years and is projected to rise by 10-15% again in 2011. Analysts estimate that China may overtake India as the world's largest gold buyer sometime this year. (For related reading, see 8 Reasons To Own Gold.)
Central Banks Have Been Buying Gold
Central banks around the world have been buying gold to reduce their reliance on the weakening U.S. dollar as a reserve currency, and this trend is expected to continue. Whereas central banks were net sellers of gold a decade ago, they're now becoming net buyers - and that's a very bullish sign for gold.
How High Will Gold Go?
There are a lot of compelling signs that the bull market in gold will continue, but they certainly aren't guarantees. With any investment there's a risk things won't work out as expected. At this point, though, many investors believe gold still has room to run. Some are even projecting a 30% price spike to $2,000 an ounce by the end of 2011. More conservative estimates call for year-end values closer to $1,600 an ounce, barely 4% higher than current prices. Investors will need to do their own homework and decide for themselves where they think gold is headed. (For related reading, see Gold: The Other Currency.)