Can gold hit US$ 1,500?

With the yellow metal gold perched nicely at the US$ 1,100 per ounce levels, bets are being placed on what could be the next probable target. 1,200? 1,300? Some say even US$ 1,500 by the end of 2010 does not look like a very tall order. Indeed, gold has come a long way. But before one gives into the euphoria, it is worth remembering that similar forecasts were also being made for crude oil when it touched highs of US$ 140 per barrel a couple of years back and investors who would have bought into this story, hoping that they could exit at US$ 200 per barrel, would have surely learnt some harsh lessons about asset bubbles the hardest way possible.

Hence, before taking the plunge, a reality check is indeed in order. All things considered, gold is essentially a bet on the collapse of the current monetary arrangement based on paper currencies. And although the US dollar looks like an extremely overvalued currency right now and prone to collapse, what if the US economy does not collapse and actually recovers and the Fed starts raising interest rates.

This should result in inflationary pressures subsiding and could also lead to correction in prices of gold in the near to medium term. Over the long term though, the decline of the US dollar is a far more certain phenomenon and hence, making gold a small part of your portfolio would indeed be the right thing to do.

But as the example of oil demonstrates, do not try to predict the near term scenario and do not go overboard with your bets. Always stay well diversified and invest taking into account long term trends.