Gold Price Hits New Highs, and Could Double Again

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"In inflation-adjusted terms it still has some way to go before matching its 1980 peak of $2,300."

Gold rose to a new record above $1,042 an ounce this week, finally eclipsing the $1,030 mark reached in March 2008. In inflation-adjusted terms it still has some way to go before matching its 1980 peak of $2,300. The catalyst for gold's latest jump was a renewed dollar slide. Among the causes was speculation that China and Middle Eastern states had held secret talks about changing the pricing of oil from dollars to a basket of currencies and gold. The Saudi Arabian authorities denied the story.

Various versions of this rumor have been heard before, and the plan seems absurdly impractical, said Ulrich Leuchtmann of Commerzbank, but it does "match the current zeitgeist" very well. With the dollar on the slide and its long-term prospects unappealing, its eventual demise as a global reserve currency—and what might succeed it—has become a hot topic.

As paper currencies are being debased, investors are rediscovering that gold is "the ultimate currency" as you can't just print more.

And with monetary policy so loose around the world, which greatly increases "the risk of a blow-up in inflation in the future", as Adam Farthing of Deutsche Bank pointed out, gold's role as an inflation hedge is back in the spotlight. Central banks should also become net buyers of gold now as they diversify their cash reserves. Given all this, Deutsche expects gold to exceed $1,100 next year, while John Brynjolfsson of Armored Wolf predicts $2,000 gold by 2012—and "it could happen a lot faster."

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