Gold is traditionally seen as a bastion of safety in uncertain times. When currency is in flux, when stocks are volatile and when the wealth of a nation appears to be gutted, that's when this precious metal attracts a lot of attention.
Given the economic turmoil and fears of inflation that give gold a boost, James DiGeorgia, editor of the Gold and Energy Report (www.goldandenergyadvisor.com), suggests that strong buying by the investing public and speculators could drive the price of gold to $2,500 to $5,000 per ounce. With the unstable stock market, meanwhile, DiGeorgia says more investors are now looking to gold for bigger returns as well. Independent investment demand for gold is up 121% since January 1.
Yet when you ask different analysts, the future of gold seems much more problematic than that-and there are big discrepancies in the latest investment outlooks for the metal.
Over the past year, gold bullion prices broke above $1,000 an ounce only to fall below $900. Gold prices rallied on fears about the banking system. But then they pulled back amid stock market rallies. Later, gold surged again as the dollar weakened and inflation fears spread.
As of mid-August, the price of gold had risen to $946 from a low of $866 earlier this year, during a period when the dollar declined to a six-month low against the euro and other currencies.
"It is no sure thing," DiGeorgia acknowledges about gold. "There are always exogenous factors. U.S. government bailouts have hit $12.8 trillion. And current government economic plans will increase our debt by a staggering $9.3 trillion over the next decade. If only 1% of current Wall Street investors cross over into gold, the gold market will expand to multiples of its current size."
Dan Deighan, CEO of Deighan Financial Advisors in Melbourne, Fla., is concerned about what would happen to gold holders if there were a big currency devaluation. In a worst-case scenario, people would use gold to pay for goods and services. Those who owned mining stocks, precious metals mutual funds or exchange-traded portfolios would have to sell their shares to get cash while the currency lost value. He favors legal tender gold coins to mining stocks and gold exchange-traded funds.
"It is important to have physical possession of the metal," he says. "The primary reason that we're investing client funds in gold bullion and coins is because it's a defensive play. Currency devaluation isn't extremely probable, but it's possible with a lot of things that are happening right now."
John Nadler, an analyst with Kitko Inc. in Montreal, says the gold price has eased because people are willing to take more risks in the stock market. As a result, demand for exchange-traded gold bullion funds faltered after hitting a record high in April.
Larry Adam, chief investment strategist with Deutsche Bank's private wealth management division in New York, says that inflation may not be a problem this year or in 2010. His forecast for this period calls for a 1.5% inflation rate in 2010 and a rise of just 7% in gold.