Excerpted with permission of the publisher John Wiley and sons, Inc. from The Trader's Great Gold Rush by James DiGeorgia. Copyright (c) 2010 by James DiGeorgia.
By James DiGeorgia
At any given time, there are four separate influences on gold's price. The combination of these forces determines what the price will be on any given day. The four forces are:
1. Gold's fundamentals as a commodity.
2. The value of the dollar.
3. Gold's role as a safe haven during political crises (war, political unrest, etc.)
4. Gold's role as a safe haven during economic crises (inflations, market crashes, etc.)
The first force is easily understood. Gold is a commodity, and its price is influenced by supply and demand. When supply is weak and demand is strong, the metal's price will rise.
The second force is also easily understood. Because gold is priced in dollars, its price will rise as the dollar weakens.
The third and fourth forces are often closely related. In today's global economy, most financial assets have counterparty risk. Currencies are constantly being depreciated by their governments, bonds are defaulted upon, stocks are dependent on the performance of the underlying company, and the list goes on.
However, gold has no counterparty risk. It's inherently valuable, and if you own it, that value is yours. It's immune from government depreciation, corporate misbehavior, wartime disruptions, or whatever. A few other investments have this immunity as well: real estate, for example. But even among these assets, only gold is portable, private, liquid and eagerly accepted all over the world.
Therefore, gold surges whenever trouble breaks out. We saw this when gold popped up by over 71 percent from mid-1982 to early 1983, thanks to a sharp recession in the United States and trouble in the Middle East .
We saw it again from 1985 to 1987, when gold rose over 59 percent. Major wars were dragging on in the Middle East (between Iran and Iraq, and the continuing Soviet invasion of Afghanistan). Meanwhile, the United States economy slowed during what was called a "soft landing," culminating in the Black Monday crash on Wall Street.
When Saddam Hussein gathered his army on the border of Kuwait in July 1990, and then invaded in August, gold surged by 17 percent in just two months. The terrorist attacks of 9/11 forced gold up by 10 percent immediately.
Obviously, we aren't hoping for bad events to occur. Nevertheless, they occur frequently enough that we need to be prepared. Gold is an excellent way to do this.
Gold's fundamentals are very strong, even after several years of rising prices. All the forces that drive gold's price up are aligned in the same direction. Together, they will combine to force gold's price up to $2,500 in the not-too-distant future.
The exciting thing about gold is that its bull markets tend to be monsters. Previous bulls have seen the asset's price multiply by five and even six times. In the past, we've seen the price multiply by 19 times over the course of a decade.
Will the price go up in a straight line? Of course not. No market ever does that. I expect one or more corrections along the way - sharp plunges by as much as 20 or 25 percent. But these will be mere bumps along the road. In fact, savvy investors will treat them as the buying opportunities that they are. Rarely does any market see all its price-determining forces lined up the same way - but that's what's going on in gold today.