A $3,000 price tag would have seemed farfetched a decade ago, when the price was around $300, or even when gold first crossed $1,000 an ounce in 2009. But the political and economic uncertainty pushing gold higher isn’t over, because debt and spending problems around the developed world look so entrenched.
Here’s a look at what will drive gold prices higher:
1: Fears of out-of-control governments
You know the litany by now. In the U.S. and Europe, excessive government promises and debt are creating a financial storm. There are no easy solutions. “I am not sure there is the political will to really address the problems,” says Brian Hicks, co-manager of U.S. Global Investors Global Resources Fund. At some point, though, a more serious crisis will hit “and that is when you are going to see gold take off,” he says.
2: Negative interest rates
When the best you can do with your cash is pay someone to hold it — as opposed to earning interest — owning gold looks a lot more attractive. And with inflation at 2% or so, and U.S. Treasurys earning around that amount and money market funds earning far less, that’s what we have right now.
3: Central bankers are buying again
Central banks, especially in South Korea, Thailand, Russia and Mexico, are buying gold again, adding to demand. By the middle of July, central banks had bought more gold this year than in all of last year, according to the World Gold Council.
4: Gold supplies are limited
Mining adds only a small percentage to overall gold supplies above ground each year, so the supply is limited. “There’s so little physical gold, it just takes a small increase in demand to have a big impact on prices,” says John Hathaway, the manager of the Tocqueville Gold.
5: Gold still looks cheap, by some measures
Unlike a stock, gold has no earnings or cash flow. So how do you decide if it’s overvalued? By comparing its value to common benchmarks. And by several comparisons, gold still looks cheap. Gold would have to hit $6,400 an ounce for it to match its value relative to the Standard & Poor’s 500 Index ($INX 0.00%) when it was at highs in 1980, points out Deutsche Bank analyst Michael Lewis.