Negative real interest rates plus aggressive monetary stimulus from central banks globally is a potent formula for higher gold prices that could send the yellow metal to $10,000 an ounce.
Most of the G-7 countries are struggling with negative interest rates; investors in those countries who have their savings in cash and low-yielding investments (T-bills and money market accounts) are actually losing money due to inflation.
If this is tough for investors, it is catastrophic for central banks with millions in reserves. Therefore, central banks around the globe have sought protection by diversifying into gold bullion. So much capital flowing into gold has the potential to push prices up, and many analysts forecast gold at $2,200 during the first six months of 2012.
While real interest rates look to remain in the red for the foreseeable future, many countries are printing record amounts of currency with accommodative monetary policies. Quantitative easing policies will likely continue in 2012.
Central banks have the printing presses into overdrive simply because they need the cash. As they print money and increase supply, currencies become devalued. Gold is generally a benefactor of this kind of policy, because it acts as a store of value.
While the gold price has followed the same upward path as money supply over the past 14 years, it hasn’t been able to keep pace with M2 growth. In fact, if the global money supply were backed by gold, gold prices would be much higher. Gold would be more than $5,000 per ounce if just half of global money supply were backed by gold. If the world’s total money supply were backed by gold, one ounce would be more than $10,000.
We’ve been here before, of course. When great nations mature and over-extend themselves, they revert to the path of least resistance: borrow and/or print money. They all did it and they all failed; this time will be no different.
To read Frank Holmes article: You Can’t Print More Gold
- Forbes: Central Bank Appetite And The Monetary Case For $10,000 Gold (cointrader.wordpress.com)
- Gold’s Purchasing Power Rising ‘Dramatically’ (bmgbullion.com)
- Is Gold Still The Answer For Investors? (bmgbullion.com)
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