Is Gold a Safe Investment in the Current Economic Situation

Is gold a safe investment in the current economic situation? Global demand for gold has been on the rise and with good reason- the price of the precious metal has been consistently breaking new highs even though markets throughout the world remain weak (Lee, 2011). In the last decade alone, gold has achieved a 500% increase in value and more relevantly, it has soared from $1400 (an ounce) in January this year to a peak of $1920 (Prial, 2011). Thiru (2011) of Lloyd TSB, determined that gold has provided the best returns for investors in 2011 (as cited in Lee, 2011).However, distinguished private banks and investors remain cynical of gold’s invariable rise and have even deemed the asset as â€Å"the ultimate bubble that will eventually burst† (Soros, 2010; as cited in Conway, 2010). Despite the warnings of George Soros and Wells Fargo, the yellow metal continues to sustain its steady run and is, according to West (2011), looking stronger now than it has ever been in the l ast decade. This study aims to investigate the justifications behind gold’s rising value and will also consider the relevant refutations that discredit the commodity’s safe haven status.The recent appreciation in gold prices can be substantiated on a wide array of merits, disapproving the claims that the commodity is artificially overvalued. Firstly, as affirmed by Spall (2008), gold retains its value even during inflation and consequently, has become a popular avenue for wealth investment in periods of great uncertainty. Early signs of global economic instability induced the European Central bank to heavily reinforce its gold position more than 2 years ago (Prial, 2011).And while the Euro zone truly faces a deepened fiscal crisis, gold is becoming even more attractive still. Because most economies throughout the world remain weak, currencies such as the Swiss Franc, dollar assets such as US treasury bills and other investments that were once considered secure, have lo st the confidence and backing of investors. Alternatively, people look to gold as a stronger and safer investment. Ironically enough, economies that do manage positive growth, such as China and India, have also been witnessing rising demand for the yellow metal.In the case of India, this comes in the form of consumer goods such as jewelry. The People’s Bank of China has one of the lowest rates of gold reserves but is planning to double its issuance of gold bullion Chinese coins in the near future (Holmes, 2011). In the past the gold standard was used as a basis for exchange, but inefficiencies in substantiating the system saw the link between the US dollar and gold removed. Nonetheless, the value of gold still retains a strong correlation to the value of the dollar (Hajjar, 2011).With the Federal Reserve’s freedom to print money, the value of the dollar in circulation has reached trillions. Contrastingly, levels of gold production have remained moderately constant thro ughout time. The imbalance in the value of USDs versus the value of gold reserves, gives the commodity augmented capacity for further price increases. The soaring gold prices can also be explained by the unconventionally large amounts of quantitative easing that has taken place in recent years. Such a policy causes inflation and uncertainty, which in turn makes gold more popular.In late September, Ben Bernanke declared ‘Operation Twist’ -which would cease additional printing of money. Commodity markets responded poorly to the announcement, with gold devaluing by nearly 9% in just two days (Prial, 2011). Although gold prices eventually sustained in value and proceeded with its run, the commodity’s sharp plummet after a single policy revision creates doubt in the safety of gold investments. It also introduces the possibility that gold’s upward trend has been the result of risky commodity speculation.Nevertheless, by acknowledging the current level of economi c instability, lack in investment alternatives and unstable dollar value, the present high price of gold can be easily accepted. An educated guess would have me value the yellow metal at a stable $1700 an ounce by the end of this year. As long as market volatility persists, gold will be able to keep its high prices afloat and retain its position as a safe investment. If the commodity truly is in a bubble, then it is likely to burst- in a convincingly upward manner.