The events of the last weeks have been remarkable-and that’s putting it mildly. A near credit default by the U.S. Government. A downgrade of the U.S. credit rating. Riots in the United Kingdom. Massive declines and advances in global equity markets. And-no surprise here-a big rise in the price of gold.
Commodities traders were slightly surprised to see the price of gold break through the $1,500 an ounce barrier in June. The rise continued: in mid-July, the price had climbed to $1,567.70 an ounce. On August 9, the price rose 2.7% to $1715.01 an ounce.
With the ongoing turmoil in global equity markets likely to continue, the price of gold is likely to endure some volatility but several analysts are predicting that gold could increase to over $2,000 by the end of 2011.
Goldman Sachs, the U.S. Investment Bank, believes the price of gold will continue to rise, forecasting gold will hit $1,860 an ounce in the next year.
«With our US economics team lowering their outlook for US economic growth, implying US real rates will remain lower for longer, and with sovereign debt issues in both the United States and Europe intensifying, we are raising our gold price forecasts,» wrote the commodities analysts at Goldman Sachs.
There’s been a rush to buy gold-just in the last month. From the beginning of the year until early July, investors bought 8.4 million ounces of gold. In July, investors purchased 18 million ounces.
An Interesting Correlation
In the past 30 years, every time the U.S. has raised its debt ceiling, the price of gold has risen. And the U.S. just raised its debt ceiling-it took the politicians until the 11th hour but it happened. While another increase in the U.S. debt ceiling may be a long time away, the slow progress of the U.S. economy may mean more money printing. This devalues the dollar further and sends investors into gold.
While financial issues in the United States are worrying, it would be a mistake to pick on the United States solely. Global investors are also extremely worried about Europe-specifically debt defaults in Spain and Italy. And the Chinese economy continues to overheat, meaning it’s battling inflation. Just two more reasons for the price increases as investors buy gold as a hedge against inflation.
There’s no way to predict the price of gold precisely and there will be several troughs and spikes over the next several months but the long-term outlook is excellent for the price-and for those who want to purchase gold.
The inability to buy gold bullion, due to the increase in price, is now a big problem in Pakistan, where couples scheduled to get married are having to delay their nuptials because the families cannot purchase gold. Traditionally, families are supposed to provide gold ‘tolas’ (almost half a troy ounce) as a dowry.
These couples may have to wait. It’s not certain the price of gold will reach $2,000 an ounce by the end of the year but the engines driving the price of gold upwards are firing on all cylinders-as we are seeing.