Why Gold Could Go Even Higher

Back in the late 1990s, there was a raft of books calling for the Dow to reach 30,000 or even 100,000. Looking back on it, it seems crazy. But such things are natural during bull markets. Interestingly enough, book titles can be an indicator that a bubble is about to burst.

When it comes to gold, we are starting to see something similar. For example, a recent book called Hard Money makes the bold prediction that gold will eventually hit $10,000 per ounce. It’s inevitable that we will see other titles hit the market soon.

But in the case of Hard Money, the author is not a crackpot. He actually manages the GBI Gold Fund and is the head of Global Research at the Teacher Retirement System of Texas. He even convinced the pension fund to take a major stake in gold in 2007.

#-ad_banner-#True, there are many top-notch analysts who have made bad calls. Not many saw the collapse of 2008, right? But in the case of gold, there are certainly strong arguments why the price can go higher. However, there will need to be some key drivers.

One factor is that the global economy will need to remain volatile. Unfortunately, this seems to be likely. With the latest round of quantitative easing from the Federal Reserve, the printing of dollars continues at an alarming rate as the budget deficit continues to expand.

The debt explosion is not just in the United States, but also in Japan and Europe. The problem is that it becomes nearly impossible to pay off these debts with onerous tax hikes. In its place, governments will instead rev up the printing presses and monetize the debt.

The upshot is inflation. This is what happened to the world economy during the 1970s, in which gold spiked 23 times its value.

So if inflation does erupt in the next few years, there’s a good chance that investors will see gold as a store of value — that is, an alternative to the U.S. dollar. The main reason is that governments cannot print it. In fact, global gold production grows roughly +1% to +2% per year.

Consider that this week that Robert Zoellick, the head of the World Bank, wrote an op-ed piece in the Financial Times about how the world needs a new monetary system. He thinks gold should play a role, as well as a basket of other currencies like the yen, the euro, the yuan and the pound.

If this happens, central banks would need to buy up large amounts of gold. This will be especially the case in Asian countries, which have much lower levels. For example, China only has 1.5% of its reserves in gold.

But central banks will not be the only buyers. It’s likely that major institutions will get aggressive. All in all, their holdings are currently negligible — well under 1% of total assets under management. Yet if money managers increase the allocation to 1%, this would amount to a stunning $900 billion.

So if central banks and institutions boost their allocations of gold, there could easily be a major shift in assets. Of course, this is not likely to happen immediately but it could in the next few years. And while it still may not be enough to get the price of gold at $10,000, there would certainly be enough support to keep the bull market in gold fairly robust.

Action to Take –> There are various ways to play the gold trade. One is to buy mining stocks. [See: “The Best Gold Stock to Own Today”]

While this can yield good results, it can still be time-consuming. After all, you need to crunch the numbers and understand the gold reserve levels. And yes, management may wind-up making bad decisions.

An easier approach is to use an exchange-traded fund (ETF) such as the SPDR Gold Trust (NYSE: GLD). This gives you a fractional, undivided interest in gold bullion (which is warehoused in London). It is much cheaper than buying the actual commodity, which includes insurance and storage costs.