By BEN LEVISOHN
Has gold reached its peak? Don’t bet on it.
ReutersWiener Philharmoniker gold coins at the Ginza Tanaka store in Tokyo. Gold prices have rallied this year, part of a decade-long rally.
On July 18, the price of gold hit a record high of $1,602.10 an ounce. After a sixfold rise over the past 10 years, compared with a 32% total return for the Standard & Poor’s 500-stock index, it is easy to imagine that the end of the gold rush is at hand.
But some market watchers say the reasons to own gold may be getting stronger. Cash earns nothing, with the U.S., European Union and China, among others, keeping interest rates artificially low. And paper currencies feel thinner than ever, with the possibility of government defaults in Europe and even in the U.S. The only thing worse than earning nothing on your cash is having its purchasing power go down if the dollar shrivels in value.
Those issues, even individually, can be supportive for gold,” says David Wilson, a commodity strategist at Société Générale. “None of them are going away.”A look at past bull markets in gold can help investors identify the moment when the rally has lost its legs.
The first is frothiness. Back in 1980, during gold’s previous peak, inflation was rising by 1% a month and interest rates were pushing 14%. The mood approached hysteria as the price of gold doubled in less than two months. South Africa’s international distributor of Krugerrands ran out of the popular gold coins, New York Federal Reserve President-elect Anthony Solomon was forced to dismiss rumors of a return to the gold standard, and the $1.6 trillion invested in gold exceeded the $1.4 trillion value of U.S. stocks.
While the enthusiasm for gold today is high—see the recent flurry television commercials advertising gold coins—most analysts agree that it hasn’t turned into outright euphoria.
