Rare Gold: Current Perspectives

On August 8, 2011, Goldman Sachs, one of the world’s leading financial services firm, raised its 12-month target for gold prices from $1,730 per ounce to $1,880. In a note released to the markets, the investment giant said, “We believe that gold prices will continue to rise as ten-year US TIPS yields are at an historic low, a diminished outlook for US economic growth suggests US real rates will remain lower for longer, gold prices in inflation-adjusted terms remain well below their 1980 highs, and sovereign debt concerns intensify in the US and Europe.” Is the already rare gold expected to become rarer as investors from all over the world stock up on the precious metal or will gold prices finally stabilize? These questions indicate how little we know about gold and its economic worth.

Did you know that gold is so rare that the world pours more steel in an hour than it has poured gold since the beginning of recorded history? All the gold mined in the history of the world, approximately 165,000 tones, can fit into just two Olympic sized swimming pools? As world economies have changed and evolved, gold has again made an appearance on peoples’ minds.

Is Rare Gold ‘raring’ to Go Upwards?

Marcus Brookes, director and head of Multimanager, Cazenove Capital Management, is using gold as a store of value and as a hedge against inflation. “We like gold as an alternative asset, as it helps to protect our clients assets when markets have their sell-offs,” he said. While Brookes said he still “quite liked the US dollar” he pointed out that, should another round of quantitative easing be announced, the dollar will be sold and gold will “look exceptionally good value. Gold looks a little extended, but that is because it is doing its job at a time of panic in markets,” he said. “Supply of the metal is tight and costs of extraction are pretty high, so there is a floor on the price in terms of replacement cost. Allied to this is the belief that there are now more governments and central banks that are willing to own this as an asset, whereas in 2001 they were all sellers, which is why the price was so low.”

Economic and political indictors seem bullish about gold as well. According to Bank of America-Merrill Lynch, gold prices could soon climb to $2,000 because of global uncertainties created by the downgrade of the credit rating of USA by Standard & Poor’s. This might make investors bullish about gold because of the following three reasons:

• There will be low growth and low interest rates along with high liquidity. These factors have encouraged gold prices to rally in the past.
• There could be higher pressure on Central Banks to diversify their international reserves out of the US dollar and turn it into gold.
• The world is now a financially riskier place with the current debt downgrade, thus increasing gold’s value as a safe haven.

Jacob Goldstein, correspondent from Planet Money, NPR’s podcast and blog, tries to analyze why gold is looked as a safe haven in times of economic crises. “If you look back at the Depression, England went off the gold standard, I believe in 1931, and then the US went off in ’33, and a number of other countries went off. There is this very high connection between when a country goes off the gold standard and when it begins to recover from the Depression. And that’s basically because the world was in a deflationary spiral at that time. And the essentially solution to that was, as scary as it sounds today, to print more money. When you’re on gold, indeed you cannot print more money, and there is something that sounds sort of comforting about that.”