4 Reasons Why You Should Buy Gold

Unless you’ve been living under a rock, you should know that gold prices chalked up a new record high at $1814.98/ounce this week. That means the precious metal is up by more than 30% this year! Is it time to join the gold rush? Here are four reasons why buying gold might be a good idea:

1. Safe from politics, debt, and interventions

Man smoking dollar

Will the real safe-haven please stand up? With all that’s going on in the major economies right now, it seems that not even the usual safe-havens are actually safe. The U.S. dollar is still under heavy pressure, considering the negative impact of the recent S&P debt downgrade. Combine that with resurfacing fears of another recession and the prospect of more easing from the Fed, and the U.S. dollar doesn’t seem like such a safe-haven currency anymore.

The other lower-yielders don’t seem to be faring well either since traders are uneasy about parking their money in currencies that are vulnerable to central bank interventions. Just last week, we witnessed both the SNB and BOJ attempt to stop their respective currencies from rallying. Although I pointed out that these currency interventions might not work, who knows when the BOJ and SNB will intervene again?

2. Inverse correlation with U.S. dollar

If the U.S. debt downgrade and the possibility of QE3 turned you into a full-fledged dollar bear, then you might find gold to your liking. The shiny metal has been touted as a hedge against inflation so, whenever the U.S. dollar loses value, the price of gold rises.

Based on what several economic hotshots predict, the U.S. economic landscape is looking as grim as the Grim Reaper. Goldman Sachs is willing to bet their bottom dollar that there’s a one in three chance that another recession will take place in the U.S. over the next six months. This suggests that the Fed could be forced to implement another round of quantitative easing, which might be negative for the U.S. dollar and positive for gold.

3. “Most Liquid Precious Metal” award

As Happy Pip tweeted early this week, gold might be the girls’ new best friend. After all, gold is the most liquid out of all the hard assets.

If you own gold, it would be expensive to reproduce and difficult to counterfeit, but it’s easily exchangeable for other fiat currencies. Besides, you can easily substitute one gold bar for another, unlike diamonds that vary in characteristics.

If you take a look at silver, another popular commodity, you’ll see that it also edged higher, but not at the same pace as gold had. Meanwhile, platinum, another precious metal also gained from all the risk aversion hoopla, but its price action is still often influenced by industrial demand and not speculation.

4. Further gold upside expected

If you think that the good times will soon be over for the gold buyers, then you might want to think again! For the past few days many market hotshots have been calling out more upside biases for gold.

For one, Goldman Sachs predicted that gold prices will “continue to climb in 2011 and 2012 given the low level of real U.S. interest rates.” The firm currently sees gold prices at $1,880 within the next 12 months.

JP Morgan also joined the bandwagon early this week when it raised its gold forecast by 39% and predicted gold prices at $2,500 per troy ounce by the end of 2011 alone. Talk about high expectations!

As for other analysts, Morgan Stanley, ANZ, UBS, MF Global and Barclays Capital also upgraded their gold price forecasts last week, while producers like Barrick Gold (ABX), AngloGold Ashanti (AU) and Randgold Resources (GOLD) have been making bullish statement in support of further rises in recent days.

So how exactly will you trade gold in forex? If you’ve reached the Sophomore level of the School of Pipsology, then you know that traders usually buy AUD/USD if they’re bullish on gold since Australia is the world’s second largest gold producer.

But before you buy the Aussie, you must also factor in the weak economic reports that have been coming out from Australia lately, which are taking its toll on the usual Aussie-gold correlation. Be careful because these are unprecedented times, my friends!

  • Nbhat

    wouldn’t bother with it. its in uncharted territory.

  • jpbed

    typo error: should read: ‘ and [not] easily replaced by another ‘

    • Forex Gump

      Hey bud, thanks for pointing this out!

      I actually meant that gold is “fungible,” which means that one unit
      is more or less the same as another unit. For example, a gold bar can be easily
      replaced by another gold bar unlike diamonds which vary in characteristics.
      Anyway, edited the part now. Hope this helps.

      pips to ya!

  • MikeH

    Trading gold these days is fairly easy I think. With just one question, you’d easily make a decision whether to go long on XAU/USD. -And that is: If you happened to have say 100 K, and you wanted to invest them on something fairly safe. Where would you put your money?
    USD – NOPE!
    S&P 500 – funny, am I?
    JPY – Not sure!
    CHF – Probably!
    XAU – Hell yeah! – I mean why not?

    I’m long XAU/USD since $1,400/oz ! – And I’m glad I made that decision. I’m strongly confident that the gold price will hit 2200 – 2400 probably before Christmas. Everyday the global economy is worsening and worsening. And tell me, who is thinking that someday soon, on a shine day, just like that, the global economy is gonna fix itself? – I SURELY DON’T THINK SO!

    Thinking mechanical wise, there is a limited  amount of gold being produced with the current technology. On the other hand, in 2012 the world is expecting it’s 7th Billion baby! – Which means that, with the population growing, the gold per capita, if you want to think that way, is going to decrease, which will make it more scarce. In mathematical terms we’d have something like this: GOLD per capita= C+R/P (C = *gold digging constant*, R= Gold Reserves, P = Population *which is infinite!)

    With this in mind, I entirely agree with Piponomics. Fairly good reasons.

    Anyway, I hope I didn’t confuse you. I just felt I wanted to share my insights on GOLD situation.

    • Forex Gump

      I appreciate the insight, MikeH.

      Glad your long XAU position is working for ya. Hope you’re not being hassled by the new margins though.

      • MikeH

        No Forex Gump, I’m pretty comfortable with the margins, no big fluctuations with the spread either, though the stop/profit points have been widened lately.

    • Donkeykong2387

      i hope gold goes down, this is getting ridiculous.

  • SFO Park and Fly

    The size of the diamond is another great bartering point. Many people thing “big is good”, and that’s okay, if you can afford it. Bear in mind, one large diamond is significantly more expensive (because it is more rare) than several smaller diamonds. You can look to a multi-stone ring to save some dollars and still get a dazzling ring. On the other hand, if one large diamond is what you prefer, try to get a diamond that doesn’t fall within the full carat mark. Diamonds become significantly more expensive as they reach full carat marks. For example, opting for a 1.90 carat ring versus a 2.00 carat ring will grant you great savings, and the difference is size is so minimal that no one could notice the difference.

  • Parag G Babar

    where is the gold??? JP Morgan’s forecast on gold has not been true until mid of Jan 2012…

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  • Great post! Been reading a lot about different opinions on this. Thanks for the info!