As gold plumbs below $600 an ounce, we take a look at what should be the right price for the yellow metal.
Gold is generally been seen as a hedge against inflation. It is also seen as a hedge against uncertainty, civil unrest, international conflict, terrorism and a falling dollar. Phew! So it is not too surprising that some investors have turned to gold given the troubled times that we live in.
But how much is gold really worth? And how much are you prepared to pay to insure yourself against these uncertain events?
Opinions differ greatly over the right price for gold. On the one hand there are some pundits who reckon that gold is overvalued at any price. Mind you, it does cost around $250 to produce an ounce of gold, so that may be a good place to start.
On the other hand, some experts reckon that the price of gold may rise to 4-digits. Apparently, by taking the price of gold at its peak of $850 an ounce in 1980, and factoring in inflation at 4%, they arrive at a price of $2,100 an ounce.
So there we have it, gold is probably valued at somewhere between $250 and $2,100 an ounce! But is gold really such a good investment?
Almost certainly, anyone who bought gold at its peak in 1980 will still be nursing hefty losses today. That said their losses are considerably less than when gold plumbed to a low of $284 in 1985. But despite the recent strong performance by gold, investors who bought at the peak are staring at a loss of some 30%.
Investors who have been convinced by the attraction of gold in recent years may have been caught out, too. Earlier this year gold touched a recent high of $722 amidst concerns over tension in the Middle East. Apparently, worries over Iran's nuclear development programme may have prompted some investors to seek comfort in the yellow metal. But as tensions between the European Union and Iran eased, so too did the price of gold. It is now worth 20% less than its recent high.
It strikes me that the price of gold is driven more by sentiment than by actual demand. And that should set alarm bells ringing in investors' ears. Additionally, it is worth bearing in mind that holding gold will not make uncertainty any more predictable.
What's more, many gold bugs tend to take a very short-term view. They will sell the metal almost as quickly as they warmed to it in the first place. And that is probably a good reason to give the yellow metal a wide berth at any price.
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