Gold Prices Skyrocketing: Will the Bubble Burst?

Amid the worries of U.S. equities and government debt volatility, the price of gold in dollars per ounce has increased steadily. This can be a result of the instability that has impacted the global economic system. Historically, gold has been used as protection against inflation and an indicator of the precariousness in the dollar. With professional research, analysts are expecting gold prices to encounter a parabolic rise. There is an opportunity to position an investment portfolio to exploit the fragility of the U.S. market.

History of Rising Gold Prices

On August 15, 1971, forty years ago, President Nixon took the U.S. off the Gold Standard. By doing this, he was debasing the dollar and allowing the dollar to float and be free of direct government intervention. At the time, gold was priced at $35 an ounce in August 1971 and exponentially rose to $850 an ounce in January 1980.

The graph below shows the appreciation of gold over time after Nixon took the U.S. off the Gold Standard.

Investment in Gold

For the average investor, gold seems to be an interesting venture. When the economy is underperforming, gold is expected to be a perfect hedge for any portfolio. The problem is that gold is most likely overvalued at this time. An adjustment can occur that would wipe out all gold price appreciation. This “hedge” could be dangerous.

Why would a person want to take on the risk to invest in gold? Analysts have explained this recent phenomenon.

“Lack of confidence in the global economy is pushing people towards gold,” Tom Pawlicki, a Chicago-based analyst at MF Global Holdings Ltd., said in a telephone interview. “Gold will continue to advance unless leaders are able to resolve the European or U.S. debt crisis.”

The apparent riskiness of gold is not apparent enough when gold prices are rising and U.S. equities are falling.

Future Expectations for Gold

Gold analysts have predicted that the price of gold could reach a staggering amount of $2,500 an ounce if the global economy continues to worsen. I would not trust an analyst to determine whether I should invest in a prospective venture. There is a possibility of  price fluctuations and I look forward to see how gold prices advance or retreat in the future.