Why 2012 Is A Good Time to Invest In Gold

Gold prices are likely to continue to rise in 2012 due to rising levels of government debt and increasing global political instability.
There is a strong correlation between rising gold prices and rising government debt levels that bring about currency debasement. Since investment performance is measured in currencies, some clarity about the future of currencies is in order.

Gold is Money

To properly understand gold, it must be understood that gold is money. It is not merely an industrial commodity like zinc, copper, or aluminum. Gold is traded by most major banks on their currency desks, rather than their commodity desks. In fact, after many years of modest selling they are now net buyers of gold as of 2009. In 2010, this trend strengthened and started gaining momentum throughout 2011. This trend should only strengthen further in 2012. The central banks are stockpiling gold to provide a counterweight to their currencies that they are devaluing.

Inflation Threats

Most economies in the West have reached levels of debt that are unsustainable and impossible to pay back. The U.S. Federal Reserve finds itself in a different situation than the European Central Bank, however. The Fed can print money with no restrictions. The U.S. dollar has been the world’s reserve currency for over 50 years. Since worldwide demand for the dollar has up until recently been strong, this has allowed the U.S. to effectively export what would otherwise result in domestic inflation. As U.S. debt mounts, foreign governments may flee the dollar and all that printed money may return home as high inflation.

Political Tensions

Another factor that should favor gold prices in 2012 is political instability throughout the world. The political upheavals in the Middle East are creating an environment for higher oil prices and higher gold prices. Tensions between Iran and the U.S. and Israel continue to increase, which is another trend that should favor gold.

Central Bank Purchases

Several central banks around the world started to invest in gold since 2008 (beginning of the international crisis). In fact, central banks have purchased approximately 30 million ounces of gold- about 12% of global demand. As central banks continue focusing on stimulating growth, the interest rates in developing countries should continue pushing foreign exchange reserve diversification into gold.

The gold reserves of central banks will probably return to levels not seen since the 1970′s due to monetary risks and a growing realization of gold’s importance as a monetary asset.

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