Gold is shining more than before. Bolstered by rating agency Standard & Poor’s, gold has kicked past the $1,500-per ounce mark whereas in India, the yellow metal has crossed 22,000 per 10 gram. However, most investors are in a fix as to how to time their investment in Gold. The question which everyone is clouded with – is it wise to buy gold at such a ‘all time-high’ level? Will the price of gold be sticky in future? Lets look at the value of Gold at comparable basis.
GOLD-SILVER RATIO
Gold and Silver have a very long trading history and their long-term ratio stands at 55. At the current price of $46 for an ounce of silver and $1,505 per ounce of gold, the ratio works out to 32.72. If the ratio was to stay with the mean then per-ounce-price increase in rise for gold will be much higher than silver.
GOLD-CRUDE RATIO
The long term gold-crude oil ratio stands at 15. At the current prices, the ratio stands at 13. Gold has to rise to $1,845 per ounce, if the ratio were to revert to mean and crude oil were to remain at the current level. As the crude-producing nation in Middle East is experiencing a political turmoil, crude may not recoil back. That gives enough space for gold to rise further.
PURCHASING POWER
The indiscriminate printing of currency notes and the commodity price-driven inflation are drastically affecting purchasing power of currencies globally. Inflation and low interest rates have resulted in negative real interest rates – real interest rate is nothing but the rate of interest payable minus the rate of inflation. Fundamentally, a low real interest rate environment is conducive for rising gold prices. As the fixed-income instruments fail to protect the purchasing power of investors, they prefer to stay invested in gold to protect their purchasing power. As the volatility in global financial markets (default by Europe) is expected to be in the higher side, gold will remain as a preferred bet for investors.