Spurred on by the recent purchase of India of 200 tons of IMF gold, does the current sky-high price still make gold a reliable long-term investment?
By: Ringo Bones
As the price of gold now teeters ever closer to the 1,200 US dollars per troy ounce mark, many investors are now probably wondering whether is it still feasible to join the bandwagon of investing in gold or whether this is an investment bubble that’s long overdue to burst? Fortunately for some, we are probably still a long way for such a bubble to reach critical mass for a number of reasons.
From most novice investors’ perspective, the recent purchase by India of 200 tons of gold worth about 6.7 billion US dollars from the International Monetary Fund may just seem as just a way for India to satisfy its somewhat large demand for gold jewelry. After all, it is a custom in India – even by the very poor – to purchase gold jewelry at least once a year - especially during auspicious occasions. But India is not just satisfying the needs of citizenry at the retail level given that it has been one of the world’s top ten leading gold jewelry retailers in her own domestic market for a long time now. The Indian government’s decision to bolster their gold reserves by buying the precious commodity from the IMF - even at these elevated price levels still makes sense to invest in gold for a number of reasons.
Even though the US economy is supposedly already “safely” out of the subprime credit crisis of its own creation, the “relatively high” jobless figures in America still make some seasoned investors cautious when it comes to using the US dollar as a long-term investment tool. And given its good track record as an investment asset to hedge against inflation, gold and related precious metals, still deserves its claim to fame as a prime safe haven investment tool. Not to mention every nation's monetary policy decisions in the immediate future.
At currently near the 1,200 US dollars per troy ounce mark, gold may have reached a record high in the 21st Century, but it still needs to be at least twice its current price taking account of inflation – to equal its all-time high back in January to February 1980. And given that it takes around 500 US dollars worth of energy to process a troy ounce of gold to 99.99% purity – i.e. bullion-grade purity – it is very unlikely for gold to return to its all-time low price of 200 US dollars per troy ounce back in 1999.
And a gold bubble is somewhat unlikely because due to the yearly rise in the demand of electronic goods, gold purchases for use in corrosion-resistant connectors will create a stable demand - unlike that of the seasonal demand of gold jewelry. Given that we will be more likely to be sending robotic spacecraft – as opposed to living and breathing astronauts – for space exploration in our immediate future, a steady and constant demand for gold in the aerospace sector will make the prospects of a gold bubble less likely to occur now compared back in 1980.