Last Updated Nov 10, 2010 11:05 PM EST
"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.
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.