Robert Kennedy College

Gold Can Hit $1,300 Without Creating a Bubble

Gold is often misunderstood by investors. The raise in the gold price isn't as dramatic as we think: in Swiss Francs terms Gold is now at the same price of February-March 2009. In my latest CNBC interview I have forecasted that Gold has, in this pre-inflationary environment, chances to go higher. Let's look at the supply side: Production from mines totaled 2,414 tons in 2008. There aren't any major supply expected from 2010 and supply is hence set to decrease.
On the demand side there is an increase in demand not just from investor, that can now access gold through a wide array of ETFs and ETCs, but also from Central banks like India and Russia.
In this CNBC slideshow you can see that the current allocation of China is only 1.9% of foreign reserves (around 38 billions USD). A small country like Switzerland has 29% of this foreign reservers in gold - ironically the same amount as China. If China decides to follow other central banks and increase its allocation by few points we might need a full year of gold production to meet that demand.

It is very important to notice that Gold at my predicted 1300$/ounce or even higher will have very little impact to the real economy. Hence the comparison with the Oil bubble of July 2008 is, at best, totally misplaced. Additionally whilst the oil speculation was solely based on futures hence virtual deliveries, the major gold ETFs like GLD hold physical gold and not futures.

Why are asset managers interested in Gold? Because over the last 10 years Gold has largely outperformed the S&P 500 Index. Whilst on the S&P500 we have a loss, on gold we have e.g. since 2004 + 116%. (S&P 500 performance in the same period -4.75%.

View the full GLD chart at Wikinvest

Gold did an excellent job in storing value. With so much unprecedented money printing throughout the world inflation is going to knock at our doors sooner or later. Gold is an hedge against inflation and even against major downturns (Gold is among the few commodity that turned a positive results even in 2008).
Obviously gold is not the only metal or commodity with an excellent track record: Silver has actually outperformed gold with a + 70.51% since last year
Here you can see the graphic of the UBS Etracs ETN on Silver

View the full USV chart at Wikinvest

Essentially I strongly recommend a allocation, no mater how minimal, to precious metals as their function of storage of value is appropriate in this environment and might be even better than cash and Government bonds.

Just hours after my interview Gold has hit another all time high of 1,190$ per ounce.

Feel free to download my latest Dean's Letter working paper The “Wisdom” of ETFs Investing here

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