Why Gold Prices Keep Rising

Why Gold Prices Keep Rising

Posted: May 11, 2011 9:54AM by Ryan C. Fuhrmann, CFA

Email Article

Share

Filed Under: Bonds, Commodities, Stocks, Warren Buffett

Over the past five years, stock market returns have been close to flat, but gold has returned more than 120%. The return disparity is also visible over the past 12 months, as gold has returned approximately 35%, while the stock market is up only about 12.5%. So far in 2011, the gap has narrowed, but gold is up 10% while the S&P 500 has returned just over 8%.

TUTORIAL: Safety and Income: Real Assets- Gold, Real Estate, and Collectibles

Inflation Fears

The multi-year rally in gold has been driven by a jump in demand due to inflation fears across the globe. Gold is seen as a strong hedge to inflation and a store of value as other asset classes, including bonds, currencies and cash, all of which can see their values eroded in an inflationary environment. Economic uncertainty, including the 2007-2010 U.S. financial crisis, spread to the rest of the world, and has also played a role and investors have turned to gold, given it is a physical asset that can be held on to and stored in a safe deposit box or other physical location. A collapse in real estate prices has also lowered the appeal for residential and commercial property, even though both are good inflation hedges, as they are physical assets and see their values rise along with inflation. (Add some sparkle to your portfolio by getting into this classic commodity. See Getting Into The Gold Market.)

Debt Worries

More recent fears include worries over debt levels in Europe - specifically in Ireland, Greece and Portugal - that have fueled economic uncertainty. In the U.S., excessive federal, state and local municipality debt levels have stoked fears over fiscal discipline and dampened the appeal of U.S. Treasury securities and municipal bonds as investments. These fears have also driven demand for gold as an investment, and it is seen as a...