Gold should be the foundation of any resource portfolio. The reason for this is that other resources such as oil or copper are highly dependent on world economic activity. If there is a major recession or GDP goes down considerably industrial commodities are usually hit with major declines. Gold on the other hand is not dependent on economic growth. Subsequently, the downside for gold is less than industrial commodities.
You've most likely heard that gold is a form of insurance. Other investors have mentioned that gold is a "measure of fear." When fear dominates the economic landscape and investors are worried about their savings in bank accounts or brokerages they have historically flocked towards gold.
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There are three major reasons why gold should outperform over the next 3 to 5 years.
The first reason why the gold price should increase is that there is banking instability. Over the last decade the amount of debt around the globe has tripled. In other words debt has grown at about 12% per year. However, economic growth has only been about 4%. In other words, the economy around the world has become highly leveraged. This is the reason why we are seeing problems with European banks and sovereign debt in Europe. The primary function of gold historically has been to protect and preserve assets in times of financial crisis. When debt increases to unsustainable levels, it becomes likely that we will experience several financial crises over the next few years. These debt problems will be positive for the gold price.
The second reason why the gold price should increase over the next few years is due to geopolitical or military conflict. Usually when there is a military conflict the gold price has a short-term move up. For example there was a parabolic move in the gold price during the Iranian hostage crisis in 1979. Certainly the world right now is experiencing tensions that could flare up to a major war. Israel has continued problems with its neighbors, there is instability in Pakistan and there are ongoing wars in Iraq, Afghanistan and Libya. In addition, there are indications that the general population is starting to feel angry with the political leaders. Examples of this would be the Arab spring and various protests across Europe and even the United States. It is not unimaginable for the civil disturbances to turn into the Civil Wars.
The third reason why the gold price will rise over the coming years is due to central bank policies. For the last 15 years or so central banks have pursued what is called an easy money policy. Interest rates have fallen to generational lows. Whenever the economy experiences a recession or any type of crisis the response has been to simply print money. This is been the overriding policy or philosophy of world government. For example, in the aftermath of the Lehman Brothers bankruptcy the Federal Reserve doubled the money supply in the span of four months. Interest rates since 2008 have been near or at zero. In addition, Ben Bernanke has promised that interest rates would remain at zero until 2013.
Money printing and negative interest rates are both positive for the price of gold. Rates were negative for most of the 1970s. From 1973 until Paul Volcker became chairman of the Federal Reserve interest rates were negative and that was the greatest bull market in gold in recent memory. However in the 1980s and 1990s interest rates were positive and gold struggled.
3 Reasons the Gold Price Will Rise 12 OUNCES EQUALS
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