Why Gold Will Hit $3,500

Last Updated Nov 10, 2010 11:05 PM EST

Gold hovers around $1,400, and is on its way to $3,500, according to one industry expert. While a few weeks behind schedule, gold captured the all time high $1,400 mark based on the decline of the dollar, and fears over Euro Zone debt fears.
"We have a combination: inflation fears, currency market uncertainty, fears about the financial strength of some countries," said Alexander Zumpfe of Heraeus Metals.
Compelling logic for $3,500 gold
The prediction that the price of gold will rise to over $3,500 per ounce in the next two years, is according to precious metals analyst, Andre Hudson, of Walwyn Stodgell Chochran Murray, Ltd. Hudson told the Montreal Society of Financial Analysts that gold has dramatically outperformed the stock market in the last seven years, and is likely to continue to do so.

Hudson said that hyperinflation is imminent and discredited the value of currencies. He noted the past 250 years of Anglo-Saxon political and economic dominance was an aberration in human history. "Accept the fact that North America is less equal in economic and political power" than other parts of the world, Hudson stated.

Hudson recognized that taking such views had not endeared him to the financial community.

The rest of the story
The logic used by Hudson is compelling and difficult to argue with. I do have one additional fact for you to consider. Hudson's prediction was noted in the October 16, 1980 edition of The Montreal Gazette, more than three decades ago. This was about the time that I bought gold and earned a 2.5 percent annual return, far below inflation.

Do Hudson's arguments sound familiar? All too familiar I imagine. The prediction that currencies will crumble and we will all be using gold to buy our groceries is not new. In times of fear, the same old arguments resurface. To borrow a line from the great Paul Harvey, now you know the rest of the story.


Why I love gold bugs
Performance chasing is something most investors are hard wired to do. And the hotter the performance, the more predictions there will be of further increases, and the more people will buy.

It's easy to profit from irrational investors. Precious metals and precious metal stocks are great diversifiers, as they often move in directions not correlated with the stock market. Now that they are red hot, I'll be selling some of my precious metals stock fund. It's called good old-fashioned rebalancing, and is a fool-proof way of going against the herd.

My advice

Compelling arguments such as Hudson offered in 1980 are often wrong. Never underestimate the human ability to develop brilliant arguments to support any decision we make in the pursuit of financial gain, nor the human ability to believe such arguments. Though I can't guarantee what the price of gold will be in two years, I can guarantee that buying it today will be following the herd and buying after a big run up.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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