As gold continues to oscillate ahead and below the $1,400 per ounce mark, some suggest that the precious metal could be in a bubble, but there are four reasons the metal is likely to sustain its price levels in the near future.
First, gold continues to be the ultimate safe haven in times of uncertainty. The US economy is showing signs of recovery, but at a slow and steady pace. The most recent data that illustrates this is a report by the Labor Department which indicated that US employers added fewer than expected jobs last month and payroll counts increased by 103,000 last week as opposed to the 150,000 expected by analysts. To put it into perspective, these numbers resulted in Federal Reserve Chairman, Ben Bernanke to state that it would take “four to five more years” for the labor markets to completely heal.
A second force that is likely to support gold prices is the massive U.S. trade deficit, which continues to widen at an alarming rate. According to the Bureau of Economic Analysis, the combined balances on trade in goods and services, income and net unilateral current transfers increased to $127.2 billion in the third quarter of 2010, up from $123.2 billion in the second quarter. This imbalance generally carries trading costs which could further dampen the stability to the US dollar.
Thirdly, gold offers a good method of asset diversification. The precious metal, as with most other commodities, is uncorrelated to equities and bonds, meaning that gold generally reaps the benefits when traditional equities and bonds are falling. The primary reason behind this lack of correlation is because gold prices are not driven by the same factors that drive the performance of other assets.
Gold is a nonearning asset whose demand is far more diverse than that of many other assets. Additionally, the demand for gold is driven by discretionary spending from the jewelry sector, investment demand and industrial demand; whereas demand for most commodities is primarily driven by industrial, non-discretionary demand.
Lastly, the price of gold isn’t at the mercy of government policy. Gold is an asset that cannot easily be issued or produced and is unlikely to witness large decreases in value overnight, which could result if the printing presses are in full effect and governments pump up the circulation of currency in the market.
Some ways to play gold include:
- Market Vectors Gold Miners ETF (GDX), which includes companies that are involved in the mining and production of gold in its holdings.
- PowerShares DB Gold Fund (DGL), which holds futures contracts in gold.
- SPDR Gold Trust (GLD), which is backed by physical gold bullion.
- E-TRACS CMCI Gold TR ETN (UBG), which is a way to gain access to gold through an unsecured, unsubordinated debt security.
Disclosure: No Positions