Why Gold Has Legs Even Now

08/15/2011 7:30 am EST


Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

At around $1,700 an ounce, the yellow metal may seem to be at a blow-off top, but it’s not as crazy as you may think, and there’s likely to be a lot of life left in the current rally, writes Doug Fabian of Successful Investing.

“We’re not looking at a recession yet, but we’re at a tipping point,” said Bill Gross of Pimco. The manager of the world’s biggest bond fund told Bloomberg Television in a recent interview that, “We’re at what we call a stall speed in which corporate profits don’t grow, jobs aren’t created,” Gross said.

This assessment doesn’t bode well for the economy or the stock market going forward. These words from Gross, whose widely respected opinion carries a lot of weight with money managers and policymakers all over the world, should serve as a cautionary note warning investors to be particularly vigilant going forward.

Given the fear out there in the minds of experts like Gross, you should ratchet-down risk and wait for the next big buying opportunity when it starts taking shape.

Ever since the stock market tumbled in the fall of 2008, gold has been on nearly every investor’s radar. Anyone who’s watched even a smidgeon of financial news television, or anyone who has listened to the radio, or anyone who has read a newspaper during the past several years, has been bombarded by advertisements from gold sellers touting the virtues of owning the yellow metal.

This deluge of gold ads actually should come as no surprise, because gold traditionally has been viewed as the ultimate safe-haven asset in times of economic and political turmoil.

In fact, that’s precisely what gold has become since the “Great Recession.” Over the last several years, we’ve seen a concerted flight to safety away from equities and into gold.

From October 2008 through July 2011, the price of gold surged over 75%. Compare that performance to the relatively modest (but still healthy) 35% recovery in the benchmark S&P 500 over the same period.

The fact that gold has become so popular in recent years has helped drive up the price of the yellow metal, but the surge in gold is no fluke. There are very good reasons why gold prices have climbed so much, particularly over the past several years, and many of those same reasons likely will keep the price of gold higher for years to come.

Let’s take a look at three of the biggest reasons why gold is likely to continue to be an investor’s friend.

1) Jewelry Demand
One of the biggest reasons for gold’s rise has been the purchase of jewelry around the world, especially in the emerging markets of China and India. Higher incomes, rising assets and elevated class status in the emerging markets have been at the foundation of gold’s rise.

In India, buying gold jewelry is a cultural thing. It’s the way people express their success. In China, it’s also a place for people to store money outside of the government’s purview.

When you look at the growth of these economies—especially their personal incomes—you start to get a sense of why this gold bull market is not homegrown.

NEXT: 2) Ease of Investment


2) Ease of Investment
The second reason why gold has gone up so much during the past few years is that access to the metal has never been easier. The advent of gold ETFs has created an easy way to buy and sell gold, or add gold to your IRA or pension fund, without having to worry about storage or safekeeping.

3) An Inflation/Currency Hedge
Gold always has held the mystique of being a great hedge. I think it’s actually more of a currency hedge than an inflation hedge, because when the value of a fiat currency such as the US dollar becomes devalued due to a nation’s cavalier monetary policy, you get a spike in the rise of gold.

The reason for this is actually quite simple, and it goes back to a basic economic truth. The more supply of dollars you have floating around, the less those dollars are worth.

Our nation’s monetary policy has little regard for the dollar, and that makes hard assets, i.e., assets that can’t be created via sheets of paper and some toner, more valuable. As long as the Federal Reserve continues to sink the dollar by printing more of them, the price of gold will have a positive tailwind at its back.

For these reasons, and many others, gold prices are likely to stay shiny for some time. Sure, there will be periods where gold sells off, but that doesn’t negate the overall uptrend we’re likely to experience in the metal in the years to come.

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