Many people are not aware that Gold peaked at over $850 an ounce in the 1980's. It has been in a bear (depressed market) for 20 years since but Gold has been marching higher for three and a half years, even in the absence of major inflation. Now, as investors rush to gold as a hedge, you can expect far greater increases. $1,000 an ounce for Gold would not seem unreasonable for the following reasons:

1. Chinese Gold demand overwhelming Shanghai Gold Exchange – the volume of gold trading on the new exchange is exploding so much so that the computer systems and the Gold Exchange Building will have to be replaced within months if they are to keep up with demand – the world market has recently been opened to 1.2 billion people for the first time since the Red Army marched into Beijing in 1949! According to the World Gold Council, in the past year Chinese investors have bought, on average, the equivalent of only 0.16 grams of gold. The worldwide average is 0.70 grams. In Hong Kong however, the average is 2.7 grams of gold per capita over 10 years. If mainland Chinese citizens buy 2.7 grams of gold per capita over 10 years, it will amount to nearly 111 million ounces – the equivalent of 3,850 tons of gold or more than 16 months of the world’s total gold production.

2. Rapid Westernisation is taking place in both China and India – over 3 Billion people want a better lifestyle and more quality products – and they want them now! Their demand for raw materials including gold (and oil) is massive. Since October 2003, China has come from nowhere on the world gold market to become the world’s third largest consumer, just behind India and the USA.

3. Central Bank Sales of gold have virtually dried up due to the recent multi-nation agreement – the Washington Agreement. This sale of gold by Central Banks worldwide was one of the reasons the price of gold was depressed throughout much of the past 2 decades. In fact, Central Banks are now buying gold again.

4. Mining supplies of Gold are severely limited due to the closure of hundreds of mines during gold’s 21 year bear market. The huge demand in natural resources including gold will put even more pressure on gold’s limited supplies.

5. Rising interest rates in the US will not cause a fall in demand for gold. The reason for this is that interest rates will continue to lag behind the rising inflation rate, and inflation will continue to drive down the value of the dollar as foreign currencies go up.

6. The market cap of gold shares at $70 Billion is very small. Right now the total value of all stocks is about $16.9 trillion. In comparison the total supply of gold bullion is $51 billion including both actual gold and futures. If just a fraction of a percent of the money in the world’s stock markets moves into gold shares as a hedge against inflation and/or geopolitical instability, you are looking at current share prices doubling and tripling.

7. The price of gold in the past 12 months has been rising in terms of all major currencies, not just the

8. Investors turn to gold in 3 types of environment:

(1) when inflation occurs - as in the US right now .Inflation in the US is already evident in the latest figures released. Investors will start to invest in wealth preservation strategies like gold instead of stocks and bonds.

(2) in times of economic uncertainty – for example when the price of natural resources like oil is rapidly rising out of control like it is now

(3) in times of geopolitical unrest – Part of gold’s recent strength is attributable to terrorist fears and those fears have only increased. Judging by the latest attacks, terror incidents are likely to increase in size and frequency especially leading up to elections in the US.

9. Gold mining companies have largely given up their forward-selling – a practice that helped keep gold prices low throughout most of the 1990’s. The reason for this is that they expect gold to rise dramatically in the future and do not want to be limited by agreeing to sell at a potentially lower future price.

10. The US budget deficit is estimated to be over $600 billion this year. The decline of the dollar will continue and inflation has returned dramatically. These factors occurring at the same time will drive the price of gold higher as foreign central banks begin to cut back on the percentage of reserves they hold in dollars, and start diversifying more into other currencies and gold.

11. During the latter part of 2003, the Malaysian Royal Mint introduced a new currency, the gold dinar. It is being used as a gold coin in circulation to be used as a currency. It will take time for it to catch on but when it does, it will be another reason for a huge increase in the demand for gold. Eventually the hope is that the dinar will be used as the currency of choice in trade settlement between predominantly Muslim nations instead of the US Dollar.

12. Central Bankers around the world from the US to Russia, Saudi Arabia to Egypt and Malaysia to Japan have been pumping up money supply growth to avoid the negative consequences of bursting bubbles in paper assets such as stocks and bonds. Without any gold standard central bankers have been free to do this. The effect is to have enormous amounts of money pursuing a limited supply of raw materials including gold.

13. The technical chart in the price of gold over the past 5 years shows that the trend is definitely rising and the bull market is 100% intact. Based on current cycles, Gold will peak around 2008-2009.

About The Author

Stefan Pool is an Economist and Webmaster of http://www.1st-gold-information.com. There you can find resources and information about gold, gold coins, gold investing and other gold related topics. Whether you're an gold expert or a newbie, you will find something of interest here.