What would it take to burst gold’s price?

No one ever said gold was an asset for the faint-hearted. Or indeed, for anyone who doesn’t enjoy an argument.

To some it is the only true form of money, a king over the water just waiting to be re-installed on its rightful throne once the impostors are cleared out of the way. To others, it remains, as the economist John Maynard Keynes described it, a “barbarous relic,” of no more relevance to the 21st century that the canal or the telegraph.

Still, even by its usual standards, it was more contested than ever as 2011 closed out. After running all the way up to $1,916 an ounce in the autumn it dropped all the way back to $1,550 as the year ended. So has the great gold bull market, which started in earnest all the way back in 2000, finally blown out?

Not quite. Gold will tip over into bubble territory one day. But it won’t move into a bear market until central bankers start hammering down on inflation as they did in the early 1980s. And that moment is still some way off.

True, it is not hard to make a bear case for gold.

Any asset that has been rising fast for more than a decade has to treated with suspicion. Back in July 1999, gold hit a 20-year low of $252.80 an ounce. The International Monetary Fund was a seller, and so were central banks in Australia and Britain. It looked as if time was finally being called on its role as the ultimate repository of value. As it turned out, that was the bottom of the market. Since then the price has climbed and climbed. Even give the correction before Christmas, gold is up six-fold in a little over a decade, while stocks and most other assets have gone nowhere.

That bull market has entered the popular consciousness. Ordinary people who hardly follow the markets, and have no idea what bond or currency markets are doing, now discuss gold in much the same way they used to discuss property prices. There are endless adverts offering great prices for unwanted jewelry. Gold funds pitched at ordinary investors are being launched all the time, and the bullion companies are building new vaults to store all the stuff. It even trends on Google.

If that isn’t a sell signal, it is hard to know what is. On top of that, some of the smartest players in the markets have jumped off the bandwagon. George Soros, the hedge-fund guru, has said he has sold most of his gold holdings. Like him or not, Soros is always worth listening to: he’s been right more often than most of us, and has the bank balance to prove it.

Against that, the bull case is not hard to make either. Inflation is still a threat. Central banks are still minting money. The dollar is in steady decline as the world’s reserve currency. Perhaps most importantly, the euro remains in crisis. Either the European Central Bank will print lots of money — which is good for gold — or else the currency will collapse chaotically — which would be good for gold as well. Little surprise then that the bulls are sticking to their forecast of the price soaring past $2,000 an ounce during the course of this year.

Who should you believe? One useful way of cutting through this argument is to ask this question. What it would actually take to drive the price of gold down?

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Tags: Gold analysis, Gold future prices, Gold futures, Gold investment, Gold news, Gold price, gold price forecast, Gold prices, price of gold, Spot gold, Spot gold price

Posted by admin on Jan 4 2012. Filed under Gold predictions. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry