$1,000 gold in the offing? Time for you to buy some bling bling?

Posted Oct 1st 2007 1:40PM by Tom Barlow
Filed under: Commodities

The allure of gold in an uncertain market has driven its price up precipitously in the past few years, to the point that many are speculating $1,000 an ounce is within reach. Is this the right time for you to move some of your investment into the metal?

According to John Hathaway of Toqueville Asset Management's Gold Fund, as interviewed by Barron's, gold still has a lot of upside. For investors looking for alternatives during the liquidity squeeze and nervous over the Fed rate cuts and its potential inflationary effect, gold offers an interesting opportunity. He believes that, if consumer confidence in the market continues to wane, gold could certainly reach $1,000 an ounce. He also makes the interesting observation that in 1980 the ratio of all gold ever mined to the sum value of all stocks and bonds was around 20%. The same ratio today is around 3%. Scarcity, therefore, works to support gold prices. Increasing environmental regulations, questionable governments and the growing costs of mining all suggest the metal will remain scarce for the foreseeable future.

All these factors point to gold as a reasonable investment. But, before you pony up for gold, ETFs, or gold company stocks, though, you should consider that gold is as international a commodity as you could find. As such, it is impacted by a dizzying number of factors. Hugo Chavez could muck up Venezuelan exploration. A family in India, flush with new income, buys gold as a dowry for their children. Miners might threaten a strike in Peru. Environmental concerns slow new mining development in Africa. Middle-Eastern investors, nervous about the dollar's decline, hedge their holding with gold. The British government's hoard of gold is rumored to be deteriorating in the Bank of England's vaults. New mining technology doubles estimates of Russia's Sukhoi Log gold reserve. All can move the troy ounce up and down.

A bit of checking showed me that in January of 1971, gold was at $37.88, while the DJ opened the year at $838.92. Today, gold is selling at $747.06, or around 20X its 1971 price, while the Dow is at $14,043.08, or 16.7X.

My conclusion? Long term, gold might be an attractive play, but it's not for the faint of heart. And the $1,000 mark is no more magical than a 14,000 Dow.

Tags: featured, gold, gold as investment, gold etf, gold supply, GoldAsInvestment, GoldEtf, GoldSupply