Triggers that could push gold to $5,000 per ounce

While they may not be readily recognized, the triggers that could push gold over $5,000 per ounce are always there.

Few investment vehicles are more maligned or misunderstood than gold, and yet there is logic in the price movements of the metal. As paper currencies get debased, it makes sense that finite commodities including oil, precious metals, food and raw materials will cost more. The question is, how much more? In order for gold to reach $5,000 per ounce, the state of the financial system would have dramatically different than it is today. That’s not out of the question, though. Here are three triggers that could potentially push the cost of gold to $5,000 per ounce:

1) Rampant inflation. Since gold is a finite commodity, it functions as a store of value. If the price of the dollar falls, it will cost more to buy gold. It’s helpful to think of higher gold prices not necessarily as a rise in the cost of a particular metal but rather as a reflection of the loss of the dollar’s purchasing power. If the value of the dollar falls dramatically in the coming years (as many have predicted), the price of gold and other commodities will inevitably go up.

2) Political instability. If the ongoing unrest in Egypt has taught us anything, it’s that investors abhor uncertainty. Political instability, war, acts of terrorism and other exogenous events create uncertainty, which forces investors into safe haven trades like commodities, gold and cash. This makes sense. Successful investors are, after all, good at accessing risk, and there is no way to access risk when political stability begins breaking down.

3) Oil shocks. The main impetus behind the 20-fold increase in gold prices during the 1970s was a sudden and unexpected surge in oil prices. If the unrest in Egypt were to spread to some of OPEC’s biggest players like the United Arab Emirates, Kuwait or Saudi Arabia, oil prices could spike dramatically, and gold would follow suit. “The two oil shocks of the 1970’s saw gold prices rise by more than 20 fold in just 9 years – from $35/oz to $850/oz,” GoldCore director Mark O’Byrne tells MarketWatch. “A 20-fold increase from trough to peak would see gold rising to over $5,000 an ounce in the coming years.”

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