Investing in Gold in 2011

Gold is without question one of the most over publicized investment assets in 2011. But there’s a good reason for this: gold has become the number one investment against the backdrop of the current economic climate in 2011.

So what makes gold such an attraction option in 2011?  Historically, a number of externalities have made investors turn to gold, including economic downturns, war, currency devaluation and volatile shares markets.  Gold has always been viewed as one of the “safest” options because of its market price, high demand and limited supply (only 200 tons of gold are mined each year at full capacity).

Why Invest in Gold in 2011?

Gold bullion hit it’s highest ever price on Wednesday (13^th July 2011), flirting at $1600 or £992 per ounce.  This is the highest price gold levels have ever reached in history.  Furthermore, economic experts and analysts such as Ben Bernanke (Chairman of the US Federal Reserve) and Granaskar Thiagarjan (Director at Commtrensz Research) suggests that gold prices could increase up to $1700 per ounce as worries over the US and Euro-zone intensifies.

The returns on gold have outperformed all other asset classes in the first half of 2011, according to research by Loyds TSB.

The price of gold has increased 6.6% since the beginning of the year.  Right now, the gold price is $1605 per ounce, representing a 21% increase since last year.  A recent report by Lee Boyce (at ThisisMoney.com) also found precious metals provided better returns over the last 10 years than commodities and UK shares. Precious metals provided a return of 36% while commodities and UK shares showed 34% and 26% respectively.

The reasons for asurge in gold prices in 2011 are plentiful.  According to Suren Thiru, at Loyds TSB, precious metals have benefited from low interest rates over the past couple of years (the average return from bank rates is 0.3%), increasing worry over the Eurozone sovereign debt crisis, and finally the US Federal Reserve’s decision to print more money and devalue the US Dollar (Quantitative Easing or “QE3”). Although Mr Benanke has not announced future money printing as imminent, it would be a 99% requirement for the US to rasie the $14.3 trillion debt by the August 2nd deadline in order to avoid being downgraded by credit ratings agencies.  As the USD is expected to reduce in value from further currency debasements, speculators are looking towards gold as the leading form of insurance.  The increased speculation of gold combined with the limited supply is what has caused gold spot prices to reach record heights.

Finally, while only 16% of demand for gold has been from investors over the last 50 years (the rest of it comes from retail and industrial usage), more than 40% is coming from investors in 2011.  This has caused a huge surge in the price of gold and other precious metals such as silver and platinum.

Reasons Not to Invest in Gold in 2011?

While there are plenty of reasons to invest in gold right now, they’re not without their pitfalls.  First of all, there are no guarantees that gold will continue to rise.  Some analysts suggest the gold bubble will burst eventually.   A recent article at Investipedia.com stated that while there is a “huge chance” that gold will continue to increase in the short term as more investors step on the bandwagon, there is a strong chance that the that the trend will reverse.

This year’s record gold prices are highly driven by speculators – those trying to insure themselves against US inflation, devaluation of the US Dollar and the Eurozone debt crisis.  However, once you remove these political concerns, the speculative price of gold will burst.  In addition to this, the demand placed on gold stock by investors is not natural nor a reflection of real consumer demands.

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