Now, let's discuss whether gold prices can reach $7,000 per ounce or not? This is the argument advanced by a New York Based Hedge Fund that says that analysis of the charts show visually how much the US Dollar has lost it's purchasing power parity. The hedge fund is of the opinion that gold is cheap by a factor of 7.
What this means is that gold prices can reach as high as $7,000 per ounce. Sometimes back, pundits were predicting a possible gold price level of $2,500 per ounce in the medium term future. Then that level was raised to $5,000 per ounce. But now, for the first time, we are hearing about a possible gold price of $7,000 per ounce.
Let's consider the basis for these predictions so that we know how much possibility these predictions have of coming true. Most of the predictions are based on the highest price achieved by gold in the 1980s bull market adjusted for inflation. On the inflation adjusted basis, gold prices are 30% below their all time high of 1980s.
Another argument advanced in favor of gold reaching high prices is the monetary base argument. Gold prices tend to track the monetary base over the extended period of time. Monetary base is the bank deposits plus currency in circulation. Increase in the monetary base is considered to be inflationary. So when expectations of inflation rise, gold prices tend to rise too. Right now, with trillion dollar bailout packages becoming all the rage, inflationary expectations are high!
Whatever, this is a fact that China, India and Russia and other countries are changing their dollar based reserves into gold reserves. Gold is a very small market. The supply of gold is limited. Even a small interest shown in the gold market can skyrocket the prices. This is precisely what is happening. Now, this is all happening due to speculation. This might the best time to invest in gold mining stocks!
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Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading stocks and currenies!