Gold Price Driver #1: Fear
The correlation between rising gold prices and rising uncertainty is clear. Whether it’s because you’re afraid to take a risky play in this shaky stock market or whether it’s because you fear political and economic shenanigans are devaluing paper money, gold appeals to investors of all stripes when fear is on the rise.
Just look at a history of gold prices, and you’ll see the biggest rises were amid some of the biggest periods of uncertainty. Adjusted for inflation, the true record of gold prices is roughly $2,500 in today’s dollars based on the peak levels of the precious metal in 1980 — a year during which the Cold War was raging, inflation was sky-high, the S&L crisis was starting to heat up and super-expensive oil threatened the global economy.
The reasoning is simple: Gold has been valuable since the days of the pharaohs and will remain valuable as long as it is a rare commodity. When you are more concerned with finding a place to store your money safely than growing it aggressively, gold is your fallback option.
What uncertainties lie ahead? Well, a short list is the ever-raging euro zone debt crisis, the prospect of a debt crisis and further credit downgrades in America, persistently high unemployment, geopolitical unrest due to the “Arab spring” and the turmoil of the 2012 presidential elections.
Seems like fear will be in favor again in 2012, which bodes well for gold investors.