GOLD´S RECENT RALLY, CURRENT VALUATION AND OUTLOOK / SEEEKING ALPHA ( RECOMMENDED READING )

Barisheff: Gold’s Recent Rally, Current Valuation And Outlook

by BMG Article Editorial on July 20, 2011

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Despite gold traditionally suffering from a lull in the summer months, this year we have seen a perfect storm of economic events bolstering its price. In times of uncertainty, as we are seeing now, savvy investors use gold as a store of value and way of protecting their wealth.


There are severe financial crises brewing on both sides of the Atlantic. In Europe, a special crisis summit is scheduled on Thursday in an attempt to prevent the debt cancer that has consumed Greece spreading to Italy, Spain and beyond.

Back in the US, Federal Reserve Chairman Ben Bernanke, strongly hinted at another round of quantitative easing when he admitted that the Fed was prepared to take ‘additional action’ including more government bond purchases, if the economy does not recover as anticipated. At this point though, surely it is only Ben Bernanke who is anticipating a recovery.


To add fuel to the already blazing fire, there is also the debt ceiling debacle which is dragging on and on. Though one would imagine some form of deal will be struck ahead of the August 2nd deadline, the failure for both sides of the aisle to come together over such a serious subject has sent shockwaves throughout the markets. Indeed, the rating agency Moody’s says it may review America’s AAA debt rating to reflect the country’s possible technical default.


In terms of an outlook for gold, the best way of looking at it is by asking what the outlook is for all the above situations getting resolved. Gold is reacting to the debt crises and irresponsible fiscal policies being employed by governments around the world. It is not gold that is rising, but global currencies being devalued by governments by excessive debt and fiat (paper) currency creation that are falling. In the last decade, the Canadian Dollar, Yen and Euro have lost more than 70% the British Pound and the US Dollar have both lost more than 80% of their purchasing power against gold. This will continue until fiscal and monetary discipline is restored, and there is nothing on the horizon to indicate that will happen any time soon.


At the beginning of the year, when gold was trading around $1350, I forecast gold would climb to $1700 – $2000 by year end. As we move past the midpoint of the year, we are certainly on track to meet that price range and the economic issues I’ve mentioned only serve to reinforce that target.