$1,506 an ounce: What's behind the rush on gold?
The price of gold has soared almost 32 percent in a year, making it the best of investments. The rise has been fueled by rock-bottom interest rates and inflation fears. Can the good times last?
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In the past, many mainstream economists were doubtful about gold as an investment. They reasoned that gold did not pay any interest and was expensive to store. However, that view is starting to change.Skip to next paragraph
In Pictures Gold's journey
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'Not in bubble territory ... yet'
In a report on Wednesday, senior economist Scott Anderson of Wells Fargo Securities writes that the fundamentals “justify the high price of gold.” The headline to his research: “Gold not in bubble territory … yet.”
Although inflation is not a major economic worry yet, Mr. Anderson thinks it’s “creeping higher and higher.” In addition, he’s concerned that reducing the soaring US government debt and deficit may entail “significant sacrifices that many Americans may be loathe to endure.”
According to Mr. Zuckerman’s book, Paulson decided his next money-making enterprise was to bet against the US dollar. According to the book, he calculated the supply of dollars had expanded by 120 percent over several months following efforts to prevent an economic depression.
“With all this spending, we’re going to have massive inflation,” said Paulson. “What’s the only asset that will hold value? It’s got to be gold.”
To Merk, the falling dollar is part of Federal Reserve Chairman Ben Bernanke’s strategy. “He [Bernanke] does not think a weaker dollar is inflationary.”
However, some other economists are not so certain gold is the best investment.
“Gold is the investment for people who have lost hope in everything else and are not thinking about what they are investing in,” says Robert Brusca of Fact & Opinion Economics in New York.
He argues that if the Federal Reserve sees inflation picking up, it will raise interest rates. “Higher interest rates are like antimatter for gold,” he says since gold pays no interest.
Optimism Congress will act
Mr. Brusca is also optimistic that Congress will act to start to reduce the deficits in the future. “The odds are they will get something done,” he says. “The purchase of gold is in some sense a play against the financial probity of the United States.”
Gold is still not at its record high value, which would be $1,945 per ounce in today's dollars, a level set in January 1980. After that it fell to as low as $437 an ounce by 2005, also in today's dollars.
Merk says investors need to be aware gold can be volatile.
“The correction in gold can be rather severe,” he warns.
Monitor intern Geoff Johnson contributed to this report.