Bubble or Not, Gold Remains Good Hedge Against Inflation

It is funny to witness how investor confidence went haywire when prices of gold tumbled $1,560.97 in the middle of December.

It is as if many have forgotten that while the yellow reached record highs of $1,915 per ounce in August 2011, this was well below the real high of $2,500 per ounce in 1980.

Presently, gold is trading at $1,600 per ounce average. Still, this is 18 per cent below August 2011's $1,915 per ounce. Moreover, this remained 46 per cent below the real high of $2,500 per ounce three decades ago.

Too much noise has been created on the daily fluctuations of the yellow metal, according to the "2012 Outlook for Gold" report of goldseek.com, that many have failed to see the major changes in the fundamental supply and demand situation in the gold, and even silver bullion, markets, including investment and central bank demand.

Gold has been 13.7 per cent higher in USD, 12 per cent higher in GBP and 14.4 per cent higher in EUR. Gains were seen everywhere even in the Chinese Yuan and Japanese Yen, at 9 per cent and 8.75 per cent respectively.

Compared with global stock markets, gold remained a safe haven and protected and preserved wealth over the long term. They all fell - the S&P500 by 1.3 per cent, FTSE by 8 per cent, the CAC by 19 per cent, DAX by 15 per cent, the Nikkei by 17 per cent, the Hang Seng 20 per cent and the Shanghai SE by 22 per cent. Even the MSCI World Index slid by 9 per cent.

Central banks have acquired 30 million ounces of gold since March 2009. Its gold reserves will likely return to the levels seen during the 1970's and 1980's. China alone, one of the largest buyers of U.S. Treasuries, has announced it will continue diversifying its foreign-exchange holdings, with its gold reserves continuously escalating by about 30 per cent annually.

Gold may experience bumpy humps ahead, but it will remain a good hedge against inflation as well as essential diversification for those who wish to protect and grow wealth in the long term.