After the rapid run-up in the price of gold, leaving shattered records in its wake, investors are trying to figure out where the precious metal is headed next. Gold leapt past 900 dollars for the first time last week, and there is speculation in the commodity pits about the price of a fine ounce (31.1 grams) soaring to 1,000 dollars.
Beyond rational reasons, there are two base human motives heating up the rush for gold: fear and greed. Investors have taken refuge in gold amid economic jitters, particularly concerns that the United States is slipping into recession.
Meanwhile, the volatility of share prices see-sawing with every tidbit of good or bad news has made gold look like a relatively stable investment. When real-estate prices slide - as they have been with the deflating US housing market - the precious metal ultimately becomes the commodity to where money runs for cover. "We are in the middle of a gold rush," said Jochen Hitzfeld, an analyst at UniCredit. Herd instincts bring out speculation.
The faster the price of gold has climbed, the more investors want to be in on the trend, fuelling an age-old cycle that has revived the ancient notion that gold equals wealth. Investors who bought gold three years ago have now more than doubled their money. Hitzfeld remains bullish about gold over the long term. He projects that the price will climb to 1,400 dollars per fine ounce by 2010. However, nearly all analysts warn against hopes of getting rich quick. Gold's rapid rise has increased the risk of a steep drop in price.
A correction could push the price down to 825 dollars, said Nikolaus Keis, also a UniCredit analyst. Financial advisers say that gold should represent only a small portion of an individual portfolio and should be considered a long-term investment. Investing in gold is much easier today, which is another factor driving up the price.
Neither gold bars nor treasure chests are needed. It's all done on paper these days - as investors buy shares in gold funds that are traded on stock markets, while the funds hold the gold on behalf of individual shareholders. Banks long ago joined the gold rush by offering special certificates and other financial products tied to gold. Shares in mining operations have proved to be money-makers, and many have risen enormously.
The weak dollar is another factor behind gold's rise. The precious metal is quoted in the US currency, and in 2007 alone the dollar lost 10 per cent of its value against the euro. Gold went up to compensate for the dollar's loss.
Extracting gold ore has become more arduous, and new supply has become short. Worldwide production is limited, but the global demand should remain high, Hitzfeld said. Taken together, all these factors are accelerating the rise in the price of gold. The 1980 record of 850 dollars per fine ounce stood for nearly 28 years. Since topping that price in the first week of January new highs have been reached regularly.
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