Gold tops $1,900 again. Next: $2,000

Spot gold prices once again pierced the $1,900 per ounce levels today, rising $28.50/oz in the wee hours of the morning, breaching the $1,880/oz resistance level and landing at $1,905/oz around 13:30 UAE time.

The price of the yellow metal is now within breathing distance of its lifetime high of $1,913/oz, made during August, and seems all set to race to the magical $2,000/oz-mark in September. Or is it?

There is no dearth of analysts on either side of the fence. While there is the group that is crying hoarse about the price of the bullion going up too far, too fast (gold price is already up 32 per cent this year – its best showing in 10 years), gold buffs are drumming up support for the price to breach $2,500/oz by the end of 2011.

While both camps list a number of reasons to back their beliefs, the precious metals market has defied logic in the near past. Gold punters point to the lingering uncertainty in global economy, the dismal growth forecasts for the US and most Eurozone economies, as well as lack of investment-grade opportunities to claim that gold will continue to outperform other asset classes on its ‘safe haven’ status.

On the other hand, there are those that point to the lack of demand for physical gold – and a surge in demand for gold ETFs (or exchange traded funds) – to claim that most of gold’s newfound backers are speculators who will cash out after making a decent profit or, in case of a sudden decline in price, will have their stop-loss margins kick in, fuelling a further decline in gold price and leaving individual investors high and dry.

History does provide some clues to the future direction of gold, but it depends on what history you choose to refer to. While the recent decade has been a so-called golden era for gold, with an average growth of 21.3 per cent per annum, the period between 1980 and 2001 saw the price of gold decline from a high of $850/oz (in January 1980) to a low of $256/oz (in April 2001).

Adjusted for inflation and potential loss of bank interest (on currency), those who bought gold at its peak in 1980 will only break even today if the price were to breach $2,000/oz. If, for argument’s sake, gold were to again decline by a similar margin, imagine the break-even year for those who enter the gold rush at current levels.

But that’s not to say that prices are already in bubble territory. They may have a fair distance to go before the bursting of the proverbial bubble. While it’ll be anybody’s guess as to which side of the gold coin will emerge winner, individual investors will do well to remember that in markets, as in life, whatever goes up, must come down. And vice-versa.

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