What’s the right price of gold?

Is the market pricing right the gold? Investors have discordant ideas. The past four years, we have heard some respectable investors like Marc Faber and John Paulson, predicting the explosion of the price of Gold. Many investor have had optimistic expectations for the price of gold, but some of them, have even predicted $5.000 per ounce. These expectations were very much based on the rise of  inflation. The biggest buying operation of financial assets in the history by the FED, should have caused, according to many respectable investors, a big rise on inflation. The only way to be protected by this inflation, it was supposed to be the safest haven in the financial world, the Gold.

The price of Gold has been one of commodity market’s most active assets in the past years. But in the last 6 month unexpectedly, the volatility in this market has collapsed. The price now moves on a narrow range between $1.100 and $1.200 per ounce. John Paulson almost lost his fame of invincible investor, after he suffered considerable losses in his fund. Some of his funds have had large positions on gold-backed ETF, around 22 million shares. 2013 was a year to forget for the billionaire investor.

Is this the end of the predictions that these investors have made years and months before? Is the market pricing on all the risks of inflation or these investors were definitely wrong? What we know about inflation is that it takes some time to spread and to be perceived by common people. This is also the reason why sometimes governments continue to print money, just to benefit from this period in which inflation is invisible but it’s also ready to burst. If inflation was something that explode immediately no government would use this technique.

How long could this period last and are there chances to see such a phenomenon happening the next years? The guys we mentioned above still continue to hold shares of gold-back ETF and some respectable governments still continue to buy gold strongly. This is a sign that central banks are worried about potential bubbles in financial markets and want to hedge their reserves with one of the oldest safest investment, the Gold.

It’s possible it could be down the road, but however we believe the price of gold difficultly could overpass the highest level of $1920 per ounce it reached on September of 2011. This opinion is based on these arguments:

  • First, the strong appreciation of the price of gold four years before was affected by the high uncertainty in the financial markets after the second recession in Europe and the possibility of a Euro-area’s disaggregation.
  • Second, we have seen higher inflation in the eighties but we haven’t seen the price of gold exploding.
  • Third, today the central banks have more sophisticated monetary tools to control the money supply and we hardly believe, an hyperinflation could surprise them.
  • Fourth, the dollar appreciation is there to continue and can only add more pressure on the down side to the price of gold.

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