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Sunday, December 16th, 2018 - Buy Gold - Bringing you trusted gold news and gold investing information since 2006

Gold Price: Short, Mid and Long-term Outlook

By Marek Kuchta, Gold in Mind

Gold hit a new all time high on March 24 when it closed at $1,447 per ounce in London. Gold is up 33% compared to March 2010 and 450% compared to March 2001. Silver hit a 31-year high, reaching $37.78 per ounce. Silver is up 127% from March 2010 and an unbelievable 770% from March 2001. Here is a brief recap of the most significant short, mid and long-term driving forces behind these price developments:

Short term (2011)

  • Portugal will apparently soon need bailout aid from the European Union. After Greece and Ireland, it would be the third Eurozone country to request outside help. Fears of further bailout candidates and an unstable Euro feed the European investment demand for gold.

  • The military conflict in Libya and further potentially contagious unrests in the Middle East (Bahrain, Yemen, Algeria, Syria, Jordan) continue. The outcome and long-term effects on the oil price are yet unclear. High oil prices would dampen economic growth, reverse the fragile economic recovery and negatively impact the stock markets. Unpromising and turbulent stock markets force investors to flee to safe heavens such as gold.

  • The Japanese earthquake/tsunami/nuclear disaster will result in a long-lasting drag on the Japanese economy. Japan, being one of the top three lenders to the United States, may need to redirect outbound financial resources towards rebuilding its own infrastructure. This would negatively impact the U.S. and the dollar while it could increase the attractiveness of gold.

Mid term (+-5 years)

  • Central banks around the world have been increasing their gold purchases (becoming net buyers in 2011, after 17 years of net gold sales)

  • Gold demand in China is growing. China has a yearly savings rate up to 40%(!) of income and government encourages citizens to put 5% of savings in gold.

  • Investors and countries are evidently moving away from the weakening U.S. dollar. China abandoned the dollar in its trade with Brazil and Russia in 2010. These BR(I)C countries now settle their trades in their own currencies. Could the OPEC follow? Some sources indicate that insider talks with this subject have been taking place.

  • Historical benchmarks suggest that the US debt as well as the debts of many European countries are now past the point of no return. In other words, any way politicians tweak the system (taxes, stimuli, laws), this debt is now too high to be paid back – virtually no country managed to recover from such high debt levels in the past without destroying its currency or its economy or both in the process. This destructive process is already under way – quantitative easing, government purchases of toxic assets, liquidity injections, etc. are just fancy names for money printing and the last desperate attempt to create the impression that these debts are being paid back – alas, with soon to be worth-less fresh paper money.

Long term (5-20 years)

  • Baby boomers: Because most countries have no savings (rather, they have massive debts), in order to pay the promised pensions (at least on paper) to retiring baby boomers, they will have no other option than to print large amounts of money and debase their currencies. Gold, being the closest tangible yet liquid alternative to currencies will benefit from this development.

  • Military conflicts: From the historical perspective, the gold price tends to rise in times of heightened military activity. While the reserves of natural resources are shrinking, the global population is growing at a rate never seen before. Because a country’s standard of living depends directly on cheap access to natural resources, fights over the remaining reserves are not unlikely—we have seen a few just lately (Middle East, Afghanistan), and new areas of tension are already on the map: Russia has newly started voicing its claims in the untouched and resources-rich Arctic continent, but so have Denmark, Canada and the United States; the Chinese are heavily investing in exploration in Africa, just to name a few.

  • Peak oil: Oil production reached its peak in 2006, which was admitted by the International Energy Agency (IAE) in November 2010 (in the preceding years and decades, the IAE would repeatedly deny such scenario). Now it is official that we cannot increase oil production above today’s levels with the current and new technology available in foreseeable future. Demand for oil, however, is projected to rise sharply. For the first time in history, oil production will not fully satisfy the demand. As a result, the oil price may start increasing rapidly. Increasing oil prices will create inflation, dampen economic growth, decrease tax revenue and further amplify the need for printing money (which in turn creates more inflation) and force people to look for alternatives to cash savings – gold will be one of them.

The altogether positive perspective for gold and silver doesn’t mean that everybody should jump to them. In the short run, precious metals markets are manipulated and very volatile (silver more than gold). Of course, given the current economic outlook, gold will be safer than Western currencies, bonds and many pension funds for years and even decades to come, but we can’t predict everything. Nature, science and politics have many surprises in store for us. Unexpected events can affect the price of precious metals in any way.

Therefore, remember to never put all your eggs into one basket. And perhaps more importantly, everybody should think about how the aforementioned trends will affect their real life, jobs and future plans. Investing in yourself, your area and community can be also very rewarding as it directly benefits you and your immediate environment. Also, you are likely to make a well-informed decision in your home arena.

Following gold, though, can give you many hints because the gold price reflects expectations of major global trends and developments. Boring? Don’t worry, you’ll follow gold naturally once you own some. Having a reputation of a safe heaven, the worse the expectations, the higher it will go. When the skies clear, it will point down again. It’s sort of an economic barometer. It tells you what weather to expect and it’s been remarkably right many times in the past. That’s why it’s always good to keep gold in mind.

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