Given the enormous appreciation of gold from $250 an ounce in 1999 to $500 an ounce five years ago and $1,452 an ounce presently, it's no wonder that there are so many proponents of a gold bubble, particularly after witnessing the stock bubble ending dramatically in 2000 and the real estate one, ending as dramatically in 2006.
Investors usually try to understand gold rates behavior by comparison with inflation rates or fiat currency developments because the first have been noticed to either increase or decrease according to the latter. It's a fact that between the end of the 1970s and early 1980s, when the inflation rate had gone up by double digits, so did gold prices, enriching prompt gold traders. Well, it would be hard to connect presently the two, given that the inflation rate in the US right now is just 1.2%.
Of course, there is no denying the dramatic depreciation of the dollar over the last ten years, particularly as a result of the trillion-figure quantitative easing intended to counteract the increasing domestic deficit, debt and servicing interest. And it's quite a provable fact that any depreciation of the dollar is accompanied by an appreciation of gold. For instance, since June, the American currency has decreased by 10% against other major currencies, whereas gold rates have increased by 14%.
As regards what's more profitable - gold versus stocks and bonds -, the answer is also based on figures. If considering the increase in gold rates during the last five years - $1,452 against $500 - we see a 23% annualized return, whereas the return on stocks in that very period was 1.1% and on bonds 6.1%. Well, this spectacular increase seems to announce a bubble, but, unlike bonds, gold doesn't pay interest, and, unlike stocks, doesn't bring earnings over time, so how could you possibly claim that the ratio of gold price to the earnings generated is too high and risky?
On the other hand, gold has proven to be the safest asset for most part of human history. And this historical argument aside, how could an asset standing for just 1% of global assets be a bubble and likely to devastate economies? What about the rest of 99%, most of them toxic derivatives and leveraged assets? Rather, given the soaring gold demand coming from central banks and retail investors, gold rates will continue to rise, therefore, buying gold would be a safe haven as it has always been.
Investors usually try to understand gold rates behavior by comparison with inflation rates or fiat currency developments because the first have been noticed to either increase or decrease according to the latter. It's a fact that between the end of the 1970s and early 1980s, when the inflation rate had gone up by double digits, so did gold prices, enriching prompt gold traders. Well, it would be hard to connect presently the two, given that the inflation rate in the US right now is just 1.2%.
Of course, there is no denying the dramatic depreciation of the dollar over the last ten years, particularly as a result of the trillion-figure quantitative easing intended to counteract the increasing domestic deficit, debt and servicing interest. And it's quite a provable fact that any depreciation of the dollar is accompanied by an appreciation of gold. For instance, since June, the American currency has decreased by 10% against other major currencies, whereas gold rates have increased by 14%.
As regards what's more profitable - gold versus stocks and bonds -, the answer is also based on figures. If considering the increase in gold rates during the last five years - $1,452 against $500 - we see a 23% annualized return, whereas the return on stocks in that very period was 1.1% and on bonds 6.1%. Well, this spectacular increase seems to announce a bubble, but, unlike bonds, gold doesn't pay interest, and, unlike stocks, doesn't bring earnings over time, so how could you possibly claim that the ratio of gold price to the earnings generated is too high and risky?
On the other hand, gold has proven to be the safest asset for most part of human history. And this historical argument aside, how could an asset standing for just 1% of global assets be a bubble and likely to devastate economies? What about the rest of 99%, most of them toxic derivatives and leveraged assets? Rather, given the soaring gold demand coming from central banks and retail investors, gold rates will continue to rise, therefore, buying gold would be a safe haven as it has always been.
About the Author:
Ask the advice of specialists on how buying gold can aid you in times of economic turmoil.
No comments:
Post a Comment