August 19, 2011
That's a question we get asked a lot lately. Stocks have been weak, bond yields low, and gold has been surging, closing yesterday at roughly $1800 per ounce. The price per ounce has more than doubled since mid-2009, drawing plenty of attention from investors and analysts. This raises two questions:
- What are the factors underlying the sharp rise in price?
- Does the rise point to more increases, or is the current price unreasonably high?
But will gold keep going up? Though at an all-time dollar high, gold is still below its 1980 peak when adjusted for inflation. Factors that point to more gains include growing prosperity in India and China, both traditional net buyers of gold, and volatility in securities markets that can scare investors into buying gold. But if you are old enough to remember the last time metals prices spiked - 1980 - you will recall that it seemed like everyone was buying and selling gold. That spike didn't end well, with prices per ounce down 50% two years after the 1980 peak. When everyone seems to want to buy the same asset, eventually everyone does. After that, who's left to buy? It happens in every bubble, and that's your risk now.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).