Why gold will go to $2,000 an ounce – with or without QE3

If there is no QE3 (quantitative easing 3 – more money printing), will the price of gold collapse along with every other commodity out there? Those who think gold is less a type of real money and more a bubble think so. We don’t.

Capital Economics is on our side: a recent note from them sums up the four excellent arguments for the gold price reaching $2,000 an ounce regardless of QE.

First, the fragility of the global economy means that interest rates will stay lower for longer, hence keeping the cost of holding gold relatively low.

Second, sovereign debt worries will continue to “enhance gold’s status as a safe haven”.

Third, central banks have become net purchasers of gold, and are likely to remain so.

And fourth, private sector demand for gold in China is rising fast, “aided by limited high quality alternatives for savers and the increased availability of investment vehicles for gold”.

The result? Capital Economics “remains firmly of the view” that gold prices will rise to $2,000 an ounce regardless of whether we see QE3 or not. We agree – but we’d also add that if we do see QE3, gold at $2,000 is going to look pretty cheap. 

  • Alastair

    My problem with gold is that unless you sell you get nothing back.

    All your money becomes theoretical and unless you do pick the peak time to sell it doesn’t matter what price it once reached.

    The gold bulls will be bullish forever, so how do you know when you’re supposed to take your profit?

  • Chris

    You take profit when the idiotic politicians stop printing money and central bankers grow some doobries and turn real interest rates positive…….. until then just close your eyes and buy gold on all the dips.

  • Bengt

    Alastair,

    Forgive me for being a philisophical diversion.

    But I’d say that the problem with currency (vs gold) is that unless you spend it, you get nothing back.

    Interest is but a digit on a ledger in the ether.

    Until your paper money is spent on a hard asset, it’s pretty meaningless.

    And gold is, above all else a hard asset. It has already given you something.

    Paper money is only as good as what it’ll buy you when you chose to cash it in. Question is, what will give you more hard assets in the future – gold or paper?

  • Teresa

    Will the end of QE2 create a dip in the price of gold and thus a buying opportunity?

    I’m with Merryn and Bengt, for all the reasons they have explained.

    I want in, but with a lump sum. I just need to know HOW.

  • Alex

    HOW is a good question, the best way IMO is Perth Mint Securities, unless you are prepared to pay for a safe deposit box, and tell HM Customs and Excise if you buy more thna £7k worth in a year. Thanks to a rising £ vs $, at $1500 and £/$1.64 gold is still about £900 an ounce, it’s up over a year, but not by very much, so not too late to get on board.

    As a farmer I’m more inclined to say land or forestry offers a better long term bet + an income than gold. But the latter two are impractical for most people. Here’s a thought though, a spruce adds about 4% to it’s mass each year, and long term lumber tends to track inflation. So if you want an alternative pension, buy a newly planted track of forest, come 30-40 years time there’s your pension pot.

    There’s a reason forestry is so popular as an investment for the rich.

  • Tom F

    ‘And I can assure you-

    As far as the eye can see the Federal Reserve will keep interest rates at zero.

    Precicely zero.

    And by zero I mean zero percent in real terms. They could be at 5% but if inflation is at 10% then you still have interest rates at minus 5% in real terms.

    Marc Faber.

    He goes on to say that emperically, gold only crashes when interest rates become positive.

    See a 6-7% real interest rate in the UK or USA anytime soon???

    I dont think so….

  • Teresa

    Alex, thank you. Your advice made a lot of sense to me. Just a few miles from here 64 acres of forestry are up for sale. Hmmm. But I think I’d prefer to buy some grazing. Rent it out. Having said that, there’s precious little land for sale. A tiny paddock here and there. I keep looking.

    As for the silver/gold, I have to ask you, why Australia? Is it for tax reasons?

  • John, Bahrain

    Hi Teresa, I have found Bullionvault very easy to use. I have been trading since September 2009 and have done very well so far. I know there are arguments against holding physical silver and gold but as a novice investor, I have found the website to be a very easy way into the market. I sold some gold and silver when my profits reached 5 figures as it seemed a significant psychological barrier. Coincidentally, it was at the same time as silver peaked. Gold has continued to power ahead so I regret selling so much now. Now I have a bit more experience I will maintain most of my exposure to these metals via Bullionvault but probably diversifya bit more through mining companies and ETFs. It is difficult to know when to dive in but I remember not long ago $1100 seemed impossibly expensive. I think Merryn is right: pretty soon $2000 will seem cheap.

  • jimtaylor

    I bought some bullion coins 5-6 years ago so I’m happy to hold, but not sure about buying at current prices, but if it goes to $2000 or beyond then maybe buying is the right decision?
    I found Chard in Blackpool good to deal with.
    http://www.chards.co.uk/

  • Teresa

    Thank you, John. Thank you, Jim. I appreciate your advice. I now only need to figure out one thing… WHEN to buy.
    I think that there is a good argument that silver will drift lower than it is today.
    However, I wonder if gold will dip to a better buying opportunity once QE2 ends in the States? If I was confident that gold would not get cheaper than it is today, I would do the transaction now. Lump sum transactions… I don’t know how to play ‘em.
    Ideas, anybody?

  • David

    Hi Teresa, I also use BullionVault, as well as GoldMoney. So far, so good.

    Nobody knows the best time to buy gold or any other investment; this is because no one can see the future, despite what they might want you to believe. Unless you think you can beat Mr Market — unlikely — the best strategy is Pound Cost Averaging. Instead of putting in a lump sum of X pounds in one go, you drip-feed it in say ten lots of X/10, spread over 10 weeks. Or 10 months, or whatever. The point is to spread the risk by buying at different times, which usually means different prices.

    Good luck!

  • jimtaylor

    Because gold is priced in $ it is also a bit of a play on the £/$ exchange rate, so if the £ strengthens once UK interest rates start to rise again there may be some upside when buying gold in £.

    The oil/gold price ratio indicates that gold may have some way to go, even though oil and gold are not really linked.

  • John, Bahrain

    I agree mostly with David although you need to be careful that you do not follow a plan without thinking e.g. always buying on the 1st of the month regardless of the market as you may end up buying when the price is unusually high. Trying to get to know the market and buying on the dips is more effective – but knowing when a dip is a dip can be the tricky part! A website that I think was suggested by Dominic Frisby appeared to show that historically the greatest gains in the year have often been in Q3 and 4 and that the summer can be a good time to buy – although of course past performance does not always predict future performance etc.

  • Tim S

    A lot of gold valuations I have seen are based on hyperinflation scenarios.

    Value = massive gold profits x very small % probabilities

    At what stage in gold’s upward price trajectory do we need to worry about significant political risk and government intervention against gold (miners/investors).

    Does anyone see governments looking to progressively tax gold investors at $2000 or does that risk kick in at $5k or $10k.

    Can gold ever realise its potential for investors if the government will steal profits in these rare circumstances ?

  • John, Bahrain

    Teresa – for what it’s worth, a couple of extracts from an interview on Bullionvault today:

    ‘Historically, from late August through the end of the year, and moving into the next, we would be in the normal rallies of gold, silver, other precious metals (PMs) and related base metals. ‘

    ‘Where is gold going to go? It stalled at $1,585/oz. during its most recent high and came back. Now it’s gradually crawling back up the hill, but we’re liable to go into choppy markets all the way through the second and third week of August. But we’re looking for a possible mini rally in the middle of July. Nothing exciting, but it will be a noticeable mini rally. ‘

    It’s worth reading the whole interview:
    http://goldnews.bullionvault.com/gold_rally_061320116

  • Margaret

    Right on Bengt! Alot of people don’t understand the difference between currency and money. Perhaps an article on the matter and relating it to commodities is warranted!
    In my opinion under all scenarios, whether inflation, hyperinflation, stagnation, deflation, physical gold/silver cannot loose.
    As you say, what is currency, a medium of exchange that can purchase something that has value (eg. asset). Money, unlike currency, has value within itself. Eg, $100 bill, do you think paper is worth $100? No, I don’t think so.
    Once people compare values of assets can they really understand if something is undervalued or overvalued.
    And since we are currently dealing with fiat currency (no backing and debased against gold/silver standard) then gold/silver is really money in itself now.

  • Gordon Freeman

    I am trying to trade gold at the moment (also on Bullionvault) and have made some profit. However I am very concerned about a potential crash due to the huge increase in price recently. Here is an interesting article predicting a crash in the gold price from May 2011-Jun 2011 ! :

    http://www.escholarship.org/uc/item/7qk9z9kz#page-2

    I saw this link from Wikipedia. I wondered what Dominic and Merryn et al think of this? I think/hope the article is wrong, as the last crash in 1980 was probably due to much higher sustained interest rates? But it does make me wary as I’m seeing the price dip now. 10% would be acceptable but 30% or more would be alot more damaging…

  • Kieran

    @17 – Gordon Freeman

    To me using a maths function to work out whether gold is in a bubble is pretty worthless ….. the cos part of the function relates to gradients within the graph, so relying on a function which at it’s heart relies on gradients seems a little short sighted.

    I, like many other people have bought silver and gold as insurance, not as an investment. This does not get factored into the bubble brigades thinking, and can’t be factored into an equation.

  • smlaing

    The best time to sell gold is……………When there’s no food in the cupboard!……or…….when the world moves to the new monetary system.

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