Gold: Long-term hedge, or bubble near burst?
old, often considered a safe place to invest in a rocky economy, climbed past its all-time high in recent weeks, fueling speculation that the price per ounce could hit $1,500. The rally was clipped last week by concerns that China could raise interest rates, which triggered a retreat. What's an investor to do? Dig deeper into the glittery stuff, or sell and collect on the gains? Here are two views:</br></br>The surge in gold prices to about $1,400 an ounce makes perfect sense. Confidence is waning in paper money, such as the dollar, and for good reason. Our monetary and fiscal policies are remarkably lax, debasing our currency as a store of value and raising the specter of inflation down the road. The Federal Reserve Board continues to pump money into the economy, and we will run huge budget deficits as far as the eye can see, dramatically expanding our financial liabilities. Martin Murenbeeld, an economist at Canada's DundeeWealth Economics, shows that over the past decade, gold prices have moved almost in lock step with the expansion of global liquidity (U.S. money supply plus overseas foreign reserves). Both have multiplied fivefold.</br></br>Our government, like those in Europe and Japan, has made entitlement-benefit promises to voters that it cannot possibly keep. Politicians will fall back on the quick fix of printing money - an easier solution than calling for steep spending cuts and tax increases. Failure to adopt tough, economically sound policies bodes well for gold prices.</br></br>Let's not forget the growing demand for gold abroad. Citizens of China and India are using their rapidly growing incomes to buy gold jewelry and to invest in the metal. Central banks in many emerging nations have become big buyers of gold to diversify their foreign-exchange reserves.</br></br>Gold provides a hedge against inflation, currency weakness and financial turmoil. Gold doesn't move in sync with stocks or bonds, so it's a good diversifier. Everyone should consider owning some.