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Six Ways to Play Money Morning’s Prediction That Gold is Headed for $1,500 an Ounce
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This Link is located in the Public Channel Housing Bubble and Bear Links.
Posted by ian 1 year 224 days ago (moneymorning.com). Views: 51
Tags: gold investing |
| Related Tags: personal finance finance economics inflation housing bubble stock market |
More than for any other investment, gold’s price depends primarily on the world’s monetary policy. When monetary policy is loose, as it was in the 1970s, gold prices soar. When it is tight, as in the 1980s, prices decline sharply. When gold prices advanced sharply after 2000 that should have told the U.S. Federal Reserve and others that monetary policy had once again become too loose.
Indeed, it became too loose after 1995, but gold prices were temporarily suppressed by the world’s central banks (the British Treasury, then headed by Gordon Brown, sold the nation’s entire gold stock in 1999, at a price of around $280 per ounce - yet another reason for British taxpayers to be annoyed with their current Prime Minister).
The rise in gold prices is thus easily explained. U.S. monetary policy has been loose since 1995, and particularly since the recession of 2001 and 2002, and other countries have followed the United States’ lead. According to International Monetary Fund (IMF) statistics, the world’s total foreign exchange holdings increased from $1.4 trillion in 1997 to $6.4 trillion last year, an average annual increase of 16.4% - compared with a 7% annual increase in Gross World Product. With that kind of monetary expansion, it is not surprising that gold prices have risen; the metal is universally regarded by both the sophisticated and unsophisticated alike as the premier hedge against inflation.
Since the subprime crisis exploded onto the scene last September, the Fed has been lowering interest rates. And the Fed, the European Central Bank (ECB) and the Bank of England have been providing additional lending facilities to banks and investment banks. The lowering of interest rates has been quite dramatic, from a Federal Funds rate of 5.25% before September to 2.25% now. Even 10-year Treasury bonds, currently yielding 3.6% or so, are providing investors with a yield that remains well below the rate of inflation (currently somewhere above 4% and trending higher). The bailout of The Bear Stearns Cos. Inc. (BSC) and the continuing efforts of the ECB to restore liquidity to the short-term euro deposit market are having the same inflationary effect. As a result, commodity prices have soared in the last six months, as has the price of gold.
Gold has sold off in the past couple of weeks as the market has focused on the U.S. recession, believing that inflation pressures will decline, but that’s wrong. Monetary expansion continues and even is intensifying, meaning that inflationary pressures will increase and gold will be the beneficiary.
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