Why Has the Gold Price Risen 300%?
Source: Guardian, Kenneth Rogoff (10/3/10)
"There are sound reasons for it. . ."
Rational conversation about gold's value has never been easy. With prices up >300% over 10 years, it's even harder. Last December, economists Martin Feldstein and Nouriel Roubini penned op-eds bravely questioning bullish market sentiment, sensibly pointing out gold's risks.
Since their articles appeared, the price has moved up further
In December 2009, gold bugs argued the price was going to $2,000. Now, emboldened by continuing appreciation, some suggest it could be headed higher.
One successful gold investor explained that stock prices languished for >10 years before the Dow crossed 1,000 in the early 1980s. Since then, it's climbed above 10,000.
At $1,300, today's price is likely more than double very long-term, inflation-adjusted, average gold prices. What could justify another huge increase in gold prices from here?
Medieval alchemists engaged in what we now consider an absurd search for ways to transform base metals into gold. Wouldn't it be paradoxical, then, if financial alchemy made a gold ingot worth dramatically more?
The most powerful argument to justify today's high gold price is the dramatic emergence of Asia, Latin America and the Middle East into the global economy. As legions of new consumers gain purchasing power, demand inevitably rises. At the same time, emerging market central banks (CB) must accumulate gold reserves. With the euro looking less appetizing as a diversification play away from the USD, gold's appeal naturally grew.
There are solid fundamentals that arguably support today's higher gold price; though it is far more debatable whether and to what extent they will continue to support such prices going forward.
If you are a high net-worth investor, a sovereign wealth fund or CB, it makes perfect sense to hold a modest proportion of your portfolio in gold as a hedge against extreme events.