Gold is often misunderstood by investors. The raise in the gold price isn't as dramatic as we think: in Swiss Francs terms Gold is now at the same price of February-March 2009. In my latest CNBC interview I have forecasted that Gold has, in this pre-inflationary environment, chances to go higher. Let's look at the supply side: Production from mines totaled 2,414 tons in 2008. There aren't any major supply expected from 2010 and supply is hence set to decrease.
On the demand side there is an increase in demand not just from investor, that can now access gold through a wide array of ETFs and ETCs, but also from Central banks like India and Russia.
In this CNBC slideshow you can see that the current allocation of China is only 1.9% of foreign reserves (around 38 billions USD). A small country like Switzerland has 29% of this foreign reservers in gold - ironically the same amount as China. If China decides to follow other central banks and increase its allocation by few points we might need a full year of gold production to meet that demand.
It is very important to notice that Gold at my predicted 1300$/ounce or even higher will have very little impact to the real economy. Hence the comparison with the Oil bubble of July 2008 is, at best, totally misplaced. Additionally whilst the oil speculation was solely based on futures hence virtual deliveries, the major gold ETFs like GLD hold physical gold and not futures.
Why are asset managers interested in Gold? Because over the last 10 years Gold has largely outperformed the S&P 500 Index. Whilst on the S&P500 we have a loss, on gold we have e.g. since 2004 + 116%. (S&P 500 performance in the same period -4.75%.
View the full GLD chart at Wikinvest
Gold did an excellent job in storing value. With so much unprecedented money printing throughout the world inflation is going to knock at our doors sooner or later. Gold is an hedge against inflation and even against major downturns (Gold is among the few commodity that turned a positive results even in 2008).
Obviously gold is not the only metal or commodity with an excellent track record: Silver has actually outperformed gold with a + 70.51% since last year
Here you can see the graphic of the UBS Etracs ETN on Silver
View the full USV chart at Wikinvest
Essentially I strongly recommend a allocation, no mater how minimal, to precious metals as their function of storage of value is appropriate in this environment and might be even better than cash and Government bonds.
Just hours after my interview Gold has hit another all time high of 1,190$ per ounce.
Reader commentary
Edwin
February 7th, 2010 at 09:10pm
Dear David Costa,
You article is good. But I donot believe in this argument. I believe gold is doing well only because people do not have anything to buy in this uncertain financial ups and downs. Secondly the way President Obama is securing US, It seems in no time US will be out of this mess. I believe within the next 5 to 10 years US should be back on track. US dollar will again reign supreme and gold will collapse. Till than Gold is King.
Gary Chapman
November 28th, 2009 at 01:04pm
Hi there Dean Costa,
Very interesting predictions on the Gold price, i live in a major Gold producing country (South Africa)and work indirectly in the mining industry, we have seen a massive decline this year in mining activities as most mines have actually shut their smaller operations in favour of focussing on the larger ones, the weak U.s dollar has not assisted local mines which has caused alot of workers union organization calling for the reserve bank to weaken the currency. I will support your predictiond on the $1300 mark as we saw happen this week.