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
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
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!