Why Gold Is Undervalued And A Good Investment?

Gold maybe the best long term investment right now! While many investing gurus are calling for the demise of gold, it is infact still undervalued. Why I say that gold is still undervalued? Well, right now gold is priced around $1,000 per ounce. A few months back gold had breached the historical barrier of $1200 per ounce.

But was it a historical barrier. In the decade of 70s, gold market had seen an unprecedented bull rally. In 1980, gold prices reached $850 per ounce. In terms of 1980 prices inflation adjsted, today price of $1100 per ounce is equal to only $425 per ounce.

If we adjust the 1980 price of $850/ounce in terms of 2010 prices after taking into account the inflation, this price comes out to be over $2000/ounce in 2010. Now, we are not doing something unusual, prices are always adjusted for comparison purposes. Unadjusted prices are known as nominal prices and adjusted prices are known as real prices. Now, you can youself see that gold prices still have a wide margin to rise before we can say that they broke the prices of 1980.

This doesn't mean that this ascent will take place in a straight line. Markets never move in a straight line. In 2000 when the first bull market started in gold,it lasted till 2005 then there was a descent and then again an ascent.

You can say there will be minor downtrends in the long term uptrend in the gold market. Now why this expectation of an ascent? In the past Central Banks used to be net sellers of gold. Now suddenly most of these Central Banks are net buyers of gold. The major reason is that most of the Central Banks want to hedge against the Dollar uncertainity.

US borrows heavily from the foreign investors to finance its current account deficit. In addition to that US government is borrowing heavily to finance its budget deficit. This heavily borrowing has increased since the stock market crash of 2008 when the government decided to bailout many bankrupt financial firms. US government budget deficit is now more than $1 trillion if I am not wrong and is expected to increase in the near future. This huge budget deficit makes further borrowing more expensive and US Dollar weak in the long term.

Secondly with the FED printing more and more money to help bankrupt firms, this increase in the money supply is going to be inflationary in the long run. High inflation means a weak Dollar.

So in the coming years, those who take long positions in the gold, silver and other precious metals are going to be rewarded handsomely.

With the current financial and geopolitical situation, gold is the best bet for long term investors. There is still a long way for the gold prices to go in terms of the 1980 bull market before we can safely say that the gold prices have reached their historical high.

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