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Is the road to investment heaven paved with gold?

The meteoric rise in the price of gold just does not end! The price perounce of this metal seems to be rising every day, grabbing theattention of even non-investors.

The meteoric rise in the price of gold just does not end! The price per ounce of this metal seems to be rising every day, grabbing the attention of even non-investors.

Some have commented that gold may hit $5,000 per ounce sometime in the not-so-distant future, and many “gold bugs” foresee a $1,350 price tag by the end of the year. Can gold continue this outrageous climb? What factors can lead to a pullback in price?

At current valuations of more than $1,300 per ounce, gold is trading at an all-time high. However, some say if inflation is factored into the price, the true all-time high would be somewhere around $2,100. For this reason, some analysts believe gold can still go a lot higher.

Gold is purchased in U.S. dollars, so it is directly affected by the strength of U.S. currency. Currently, the U.S. Federal Reserve is contemplating some more quantitative easing — meaning they're considering injecting more money into the market by purchasing mortgages. The effect of this would be the flooding of the market with a lot of cash (printing money).

While this would be fantastic for the stock market (the more liquidity the better), the net effect of this type of stimulus would be the dilution of the U.S. dollar. The price of gold rises when the U.S. currency weakens, since foreign investors can buy more of the metal in their own currency. So, the last $50 dollars or so of worth in the price of the yellow metal, in my opinion, is directly related to the comments of the Federal Reserve.

Gold investors believe that a hard asset like gold will rise whether there is a deflation-related issue in the U.S. economy or an inflation scenario due to cash flooding the market. (Gold is one of the best investments to hedge against inflation.) These types of investors feel that they are in a win/win situation — and that is why they are pulling out of the stock market and into gold. Investors today are still uncertain as to where the U.S. economy is headed. They don't believe the U.S dollar is worth the paper it’s written on, and wish to own gold as a hedge!

As an investment advisor, I get asked about gold all the time. It's a very hard commodity to purchase; it can and should be a part of a diversified portfolio, but its price fluctuation is hard to understand. Its price does not fluctuate based on traditional supply and demand, like most commodities do. Gold is basically a hedge against inflation, against a weakening U.S. economy and against a weak U.S. dollar.

When the day comes that the U.S. economy shows improvement in employment, watch out gold! The U.S. dollar should gain strength, sending the precious metal down quickly. If the Federal Reserve does not pump more money into the system, you may see a pullback in the price of gold as well. If you are considering investing in the yellow metal, it should be done with all this in mind.

As with most volatile sectors of the market, gold can be a small part of investor’s portfolios. Canadian investors can definitely own a piece of gold, as mining makes up a large part of the Toronto Stock Exchange. If you're looking to purchase gold, please make sure you can handle the tremendous volatility that goes along with it. When the market gets crowded in one particular trade (everyone is buying the same thing), it is only a matter of time before we see some sort of correction — nothing goes up forever.

If you have any questions regarding the above article or are looking for an Investment Advisor to help you with your portfolio, please send me an email at asmall@dundeesecurities.com. I will be glad to speak with you!

Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.

 
 
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