Gold maybe the best long term investment right now! While many investing gurus are calling for the demise of gold, it is infact still undervalued. Why I say that gold is still undervalued? Well, right now gold is priced around $1,000 per ounce. A few months back gold had breached the historical barrier of $1200 per ounce.
But was it a historical barrier. In the decade of 70s, gold market had seen an unprecedented bull rally. In 1980, gold prices reached $850 per ounce. In terms of 1980 prices inflation adjsted, today price of $1100 per ounce is equal to only $425 per ounce.
If we adjust the 1980 price of $850/ounce in terms of 2010 prices after taking into account the inflation, this price comes out to be over $2000/ounce in 2010. Now, we are not doing something unusual, prices are always adjusted for comparison purposes. Unadjusted prices are known as nominal prices and adjusted prices are known as real prices. Now, you can youself see that gold prices still have a wide margin to rise before we can say that they broke the prices of 1980.
This doesn't mean that this ascent will take place in a straight line. Markets never move in a straight line. In 2000 when the first bull market started in gold,it lasted till 2005 then there was a descent and then again an ascent.
In other words, there are always minor trends buried in the major trends. What I mean is that there is a long term uptrend in the gold market that may have small downtrends. Now, what can be the reason for a secular long term trend? Usually Central Banks are net sellers of gold in the market. They do it to stablize their currencies. But now Central Banks have become the net buyers of gold. The reason is the weak position of US Dollar. US Dollar is the international reserve currency that almost all the Central Banks in the world hold in their vaults. Most of these Central Banks are now trying to hedge against the devaluation of US Dollar that might occur in the near future. Right now, US Dollar became more strong despite the warnings by the experts but the long term weakness of US Dollar cannot be ignore especially by the Central Banks.
US borrows heavily from the foreign investors to finance its current account deficit. In addition to that US government is borrowing heavily to finance its budget deficit. This heavily borrowing has increased since the stock market crash of 2008 when the government decided to bailout many bankrupt financial firms. US government budget deficit is now more than $1 trillion if I am not wrong and is expected to increase in the near future. This huge budget deficit makes further borrowing more expensive and US Dollar weak in the long term.
FED has been increasing the money supply to overcome the credit crunch that started in 2008 and before. Banks were reluctant to lend as most of them were hiding their losses so the credit market came to a grinding halt. This forced the FED to print more and more greenbacks. Now, these greenbacks will be inflationary in the long run. Inflation means weak Dollar! When Dollar becomes weak gold becomes strong in the market.
What this means is that in this decade, gold, silver and other precious metals are going to be good investments. Whoever is going to invest in gold right now will reap a huge reward by the end of this decade.
Then there is the current financial and geopolitical situation, all this points towards gold as good long term investment.
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Mr. Ahmad Hassam has done Masters from Harvard. Read this 40 page
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