Gold Continues to Break Through Barriers

The gold price broke through the $1600 per ounce mark recently, and most financial advisors are still very bullish on the metal. While many advisors forecast a huge rise in its value over the next year or two, their expectations differ. Some think it will rise to $2,000 by year end, while others expect it could reach at least $4,000 an ounce in the next 3-5 years.

The July 12 issue of the Daily Wealth financial advisory newsletter states that now is the best time to buy gold since 2008. One of the reasons is that investors are more apathetic about gold than they have been in years. When investor sentiment is low, it’s a great time to buy, because your upside potential is significant. In fact, the last time gold sentiment was this low—in November 2008—gold soared from $700 an ounce to $1200 in just one year. That’s 71%. Do you know of any other investments with that kind of yield?

While it seems odd that investors are apathetic about gold, since it’s been on an upward trend for the last ten years, some fear that we’re nearing the top of the gold “bubble” and every little hiccup in the gold price makes people nervous enough to dump the metal, or stay out of the market entirely.

However, if you look at the European and U.S. debt crises, both of which have not yet experienced the huge collapse they are expected to, you would realize that gold is almost certain to head skyward as currencies fail and people rush to gold as money of last resort. Gold market forecaster Ian Gordon recently stated, “…we think the sort of calamity we’re anticipating here is going to make the rush to gold quite dramatic. We’re not even sure $4,000 will be the high. It could be something significantly greater than that.”

The state of world currencies also lends important support to Gordon’s opinion. The U.S. dollar—the world’s reserve currency—has lost 98% of its purchasing power since 1933, when Roosevelt removed the gold standard from the monetary system.

Although it has regained some value in recent weeks, gold is outpacing it significantly. Over the past year, the dollar has lost more than 10% of its value, while gold has gained at least 35% in value.

The Euro exchange rate against the dollar on July 1, 2010 was 1.25. One year later, it was 1.45. The dollar is clearly on a downward trend, and when compared against the Euro, makes the Euro look attractive. However, both currencies are ailing. A better indicator of the health of the Euro is the Euro-to-Swiss franc ratio, because the Swiss franc is the closest proxy to gold in the fiat currency market. To compare, on July 15, 2010, the Euro-to-Swiss franc exchange rate was 1.34. Exactly one year later, it was 1.15—an 11% decline. In fact, since November, the Euro has been the weakest major currency opposing the dollar.

That said, both private investors and financial institutions are shedding many traditional investments and investing in gold. Central banks that were net sellers of gold a decade ago are now becoming net buyers, buying the precious metal to hold, and thereby reducing their reliance on the dollar as a reserve currency. This kind of demand will continue to drive the price of gold to record highs.

In addition, many countries are stocking up on gold. In fact, China edged out India to become the world’s largest buyer of investment-grade gold products, according to a World Gold Council report. Russia is also following suit in pumping up its gold reserves. Robert McEwen, chief executive officer of U.S. Gold Corp. said recently in an interview, “China is out to have more gold than America, and Russia is aspiring to the same.” This is not simply a one-upmanship kind of positioning. China is the biggest foreign holder of U.S. Treasury bonds, and if the U.S. defaults on its debt, China will be the biggest loser.

If you’re thinking about buying gold, it’s still not too late. Only a few months ago gold analysts predicted highs of between $1600 and $2000 by the end of this year. Since we’ve already hit $1600, $2000 is actually realistic. But don’t panic if the price of gold doesn’t move for a few months, or takes a small step backward. Smart Money Europe says that gold historically suffers “summer doldrums.”

However, considering what’s going on with the global economy, the price of gold could keep marching upward. Either way, most financial advisors see no downside anywhere in the near future.

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