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Rising gold prices may not last long: Experts

The huge federal deficit and a deteriorating economy have made many investors fearful of the US economy, driving stock prices downward, leading investors to look at gold as safer option.

twitter-logoPTI | August 18, 2011 | Updated 13:01 IST

While many analysts have forecast that gold prices will eventually hit $3,000 an ounce, after hitting a record $1,800/ounce last week, economic experts at Kansas State University have warned it is only a matter of time before the bubble bursts.

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The huge federal deficit and a deteriorating economy have made many investors fearful of the US economy entering a period of stagnation, driving stock prices downward, said Lloyd Thomas, an economics professor at Kansas State University.

In this period of uncertainty, many are selling stocks and corporate bonds and putting their money into gold.

Recently, gold prices skyrocketed to as high as $1,800 an ounce and Thomas said the price might continue to creep higher as economic concerns grow.

"People believe that gold is a hedge against uncertain times," he said. "In the long run, gold prices have kept pace with inflation. People are flocking to it," he added.

"But in 2000, the price of gold was $300 an ounce. It has gone up six-fold since then and it might go up higher than what it is right now. It's gone up too fast - it's a bubble," he claimed.

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Thomas compared his gold prediction to the housing market.

"People were lulled into thinking housing prices could never fall, but they fell more than 30 per cent in most American cities. The same thing could happen to gold; it's not risk-free," he said.

"In the last 10 years it's gone up 17 per cent a year, but the price of things we purchase has only gone up 3 per cent a year. That's unsustainable. It's my own opinion that gold prices will collapse - I just don't know when," Thomas said.

Other financial experts agreed with Thomas' prediction of a further rise in the near term, citing a perceived security in tangible investments during uncertain times.

Ann Coulson, an instructor for Kansas State University's personal financial planning programme, said the weakened US dollar and real estate market, the "wild ride" of the stock market and low interest rates have caused many investors to turn to gold.

"Where to invest has become a question for many and gold has risen to the top for some investors," Coulson said.

Coulson said there are many ways individuals may choose to invest in gold, including jewellery, coins, bullion or gold bars, exchange traded funds, gold mining stocks, gold mutual funds and gold futures and options.

Jewellery and coins are typically not good choices, she said, adding that gold bars raise many storage and cost issues.

Exchange-traded funds give the investor the opportunity to own gold without actual delivery and gold mining stocks' value is only partially dependent on the value of gold.

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