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Is $10,000 Gold On the Horizon?

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Discussions about gold often become emotional, especially so as the price of the yellow metal keeps rocking and rolling higher.

Why all the passion?

Perhaps, as Bill Fleckenstein of Fleckenstein Capital suggests, much of the up-in-arms emotion is due, in part, to just sour grapes: many investors missed an epic 300% move over the past 10 years and they’re unhappy about it.

“A lot of people know that it’s appreciated in value and they missed it,” Fleckenstein recently said in an interview. “They don’t have any intention of jumping on because they don’t understand why it went up, which is why they missed it in the first place.”

Strategists debate where the price of the 'barbarous relic' heads from here. Gluskin Sheff’s David Rosenberg is standing by his long-term call for $3,000. Louise Yamada, the eminent technical analyst, last week remarked in a client note that gold—based on its current trajectory—most likely wouldn't represent a true bubble unless and until it gets to $5,200 an ounce. (Hat tip: Barron’s)

Now Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University, and former chief economist at the IMF, has chimed in with his thoughts regarding gold. (Hat tip: Greg Mankiw’s Blog)

Rogoff writes that a successful gold investor explained to him that stock prices languished for a more than a decade before the Dow Jones index crossed the 1,000 mark in the early 1980’s. Since then, the index has climbed above 10,000. Now that gold has crossed the magic $1,000 barrier, why can’t it increase ten-fold, too?

Rogoff emphasizes that solid fundamentals arguably support today’s higher gold prices, including legions of new consumers in the emerging markets gaining purchasing power and central bankers in those same regions of the world now needing to accumulate gold reserves.

But the economist emphasizes that it’s far more debatable whether and to what extent these fundamentals will continue to support higher prices in the future.

Indeed, Rogoff points out that another critical fundamental factor that has been sustaining high gold prices might prove far more ephemeral than globalization: gold prices, he says, are extremely sensitive to global interest-rate movements.

Today, with interest rates near or at record lows in many countries, it is relatively cheap to speculate in gold instead of investing in bonds. But, he says, if real interest rates rise significantly, as well they might someday, gold prices could plummet.

He concludes: “If you are a high-net-worth investor, a sovereign wealth fund, or a central bank, it makes perfect sense to hold a modest proportion of your portfolio in gold as a hedge against extreme events. But, despite gold’s heightened allure in the wake of an extraordinary run-up in its price, it remains a very risky bet for most of us.

“Of course, such considerations might have little influence on prices. What was true for the alchemists of yore remains true today: gold and reason are often difficult to reconcile.”

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POSITION:  No positions in stocks mentioned.