Wednesday, October 6, 2010

$10,000 Gold?

Chinadaily.com.cn,

It has never been easy to have a rational conversation about the value of gold. Lately, with gold prices up more than 300% over the last decade, it is harder than ever. Just last December, fellow economists Martin Feldstein and Nouriel Roubini each penned op-eds bravely questioning bullish market sentiment, sensibly pointing out gold’s risks.

Wouldn’t you know it? Since their articles appeared, the price of gold has moved up still further. Gold prices even hit a record-high $1,300 recently. Last December, many gold bugs were arguing that the price was inevitably headed for $2,000. Now, emboldened by continuing appreciation, some are suggesting that gold could be headed even higher than that.

One successful gold investor recently explained to me that stock prices languished for a more than a decade before the Dow Jones index crossed the 1,000 mark in the early 1980’s. Since then, the index has climbed above 10,000. Now that gold has crossed the magic $1,000 barrier, why can’t it increase ten-fold, too?

Admittedly, getting to a much higher price for gold is not quite the leap of imagination that it seems. After adjusting for inflation, today’s price is nowhere near the all-time high of January 1980. Back then, gold hit $850, or well over $2,000 in today’s dollars. But January 1980 was arguably a “freak peak” during a period of heightened geo-political instability. At $1,300, today’s price is probably more than double very long-term, inflation-adjusted, average gold prices. So what could justify another huge increase in gold prices from here? (more)

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