Gold Price Outlook - A Golden Investment in 2009 and beyond

In 2008, with markets and real estate collapsing around the world, gold on a per ounce basis posted a near 5% gain (the Dow was down by over 30% in comparison). If it wasn't for the unexpected appreciation in the US dollar, as global investors flocked to the safety of US treasuries, gold could have performed even more strongly. So far this year, gold is up about $1090 an ounce. However, gold critics argue that it should have performed even better given the state of the local and global economies, while advocates of the yellow metal argue that the worst is still ahead of us and that the best gains for gold are still to come with $2,000 not beyond reach in 2009.

What might happen, no one knows. But for investors who want to hedge against potential economic turmoil, buying gold could be a good diversification plan in 2009. Like 2008, it may be one of the few asset classes that holds up at year end barring a miraculous economic recovery.

The case for gold is this: The US government is injecting trillions of dollars into bailouts and stimulus plans, a purposefully inflationary policy aimed at reviving the economy and combating deflationary pressures. If inflation results, or if the dollar weakens as the supply of dollars necessarily increases under the stimulus plans, gold is a likely winner because it hedges against inflation. Increased investor interest, driven by the forecast depreciation of the U.S. dollar, low international interest rates and investor diversification in the face of a severe international economic slowdown are also likely to be supportive for the gold price

Fundamentally, gold prices also have support as well. Since about 2001, gold production has been declining - despite increasing prices. Basic economics tells us that as the price of a commodity goes up, supply should increase as companies seek to maximize profits. However, that hasn't happened. The reasons behind this are that it's getting harder and harder to find good gold deposits at prices which it is economically feasible to extract the metal.

The opposing view: Critics say that gold prices may have peaked in 2008 and that as the global economy recovers in 2009 investors and central banks will start selling gold to restore cash reserves. This will drive gold prices down to the low $200 levels seen earlier this decade. Further, the argument that inflationary pressures will drive gold prices up (as the US dollar weakens) seem to have lost merit in the current environment where inflation is no threat at all. Also, once the economy catches gear, the [Federal Reserve] will pull the money back out of the economy and sell shares of institution it assisted negating US dollar money over-supply concerns.