Although the price of gold has exploded to unprecedented heights since the turn of the century, it still has a bright long-term outlook due to economic and geopolitical risks, according to Michael Ivanovitch, president of MSI Global, a New York-based economic research company.
At current levels, the gold price is "a bit bubbly," he cautions. "But I also believe that economic and geopolitical risks — compounded by hugely conflicted global governance — bode well for gold as a long-term investment asset."
Critics may argue that the robust increase in the metal's price — almost a fivefold increase so far this century — is due to one of the world's most serious financial crisis and the deep recession that followed.
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Yet gold bugs still have a valid case, Ivanovitch, a former economist at the OECD and the Federal Reserve Bank of New York, writes in a guest blog for CNBC.
Both the Federal Reserve and the European Central Bank continue to create huge amounts of money, he says, and are not even thinking of stopping their monetary stimulus even though inflation is already over their medium-term 2 percent target.
"What will happen to inflation when, in the months ahead, the U.S. economy begins bumping against its physical limits to non-inflationary growth, and when the euro area starts recovering later this year?" Ivanovitch asks.
Countries around the world are also perusing expansionary monetary policies to increase exports while ignoring inflation pressures. For instance, India has double-digit inflation, Brazil's inflation is accelerating and the Japanese government is urging its central bank to increase inflation to 2 percent.
"Clearly, the stage is being set for a broadening inflationary flare-up," he warns.
Central banks have been buying more gold in recent years. And demand for gold as a reserve asset will remain solid, he predicts, saying at least some countries, including China, Russia and India, will continue adding to their gold reserves as part of an effort to diversify away from dollar and euro holdings.
Many investors are eyeing economic data from China, the world's second largest gold buyer. Consumer prices there increased more than expected in December, MarketWatch reports. Rising inflation may prompt more gold buying as an inflation hedge.
"The overall trend is higher,” Jeffrey Wright of Global Hunter Securities tells MarketWatch. Volatility, he said, continues to be high and will probably continue for the near term.
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