Certainly at over $1400 an ounce, gold is at a record high price. This isn’t surprising since in rough economic times the demand for gold increases. Historically, this can be seen in the last time gold hit a record high of $850 per ounce on January 21, 1980. Actually, taking into account CPI inflation gold would have to rise to over $2,700 an ounce to reach parity with the 1980 spike. Still, a good number of analysts and economic experts are saying that gold is currently in a bubble that is about to burst. In this article we examine some of the differences between gold and other investments so that you can determine whether to believe this or not.
1. Although the day to day pricing of gold is volatile, its rise in price has been fairly steady over the last decade. ‘Certainly if you had bought gold in 2001 when the price bottomed out to $275 an ounce you could stand to make a large profit for yourself right now. However, after adjusting for inflation, the value of gold has actually decreased. This makes it a poor long term investment.
2. The Gold Price is Tied More to Speculation than Real Economic Activity
While other economic indicators like the Employment Situation and GDP have been trending up over the last 6 months, gold prices have continued to rise as well. Gold futures are also continuing to rise. Certainly gold’s industrial uses are quite limited, although they aren’t entirely non-existent. This is also the reason why gold is seen as a hedge against poor economies, and an indicator that the majority don’t expect much improvement over the next 6 months.
3. With Gold Prices as High as they are, it’s likely the U.S. Government will sell off some of its
gold assets to pay down debt.
This is in the best interest of the Feds for two reasons: first, because gold prices are so high at the moment; and second, because they would rather have people investing in stocks than in gold. This would be a good sign that gold prices have or are about to peak.
4. Historically Low Interest Rates are Bound to Go Back Up
Once interest rates begin to climb back up it will be an indicator that the economy has finally stabilized. If history is to repeat itself then you can expect gold prices to dip sharply once you see this.
5. China’s Gold Production Continues to Grow
In an effort to capitalize on the recent gold buying frenzy China has increased its mining efforts the past couple of years. In fact, they are now the largest producer of gold in the world and still have untapped areas to mine. While gold supply has historically been inelastic, this trend could change that and drive prices down.
6. Gold Buying Has Become a Part of Pop Culture
Think of the advertisements that were coming out just prior to the subprime lending crisis. Certainly pop culture has a way of turning the populace into the greater fools when it comes to speculative trading practices. Since we are now seeing this with the gold market, it’s a good indicator that the market is about to burst.
Bio: Alexis Bonari is currently a resident blogger at College Scholarships, where recently she’s been researching dental school scholarships as well as diabetic scholarships. Whenever she gets some free time, she enjoys watching a good movie or curling up with a good book.