I have been bullish on gold for several years now. Even though the gold price has had a tremendous run from $260/ounce in 2000 to its current price of $615 the underlyng factors responsible for the rise remain present. Because of this I am fully invested in gold even though I have already made a lot of money.
My current target price for gold is around $1000/ounce. I am not sure exactly how long it will take to reach that price, but it should happen before the end of this decade. So if you were to buy gold right now for $615 and sell it 3 years later at $1000, you would have made 63% or 17.5% compunded annually. And you would have made much more than that if instead you had bought shares of gold mining companies with leverage to the gold price.
Now let me explain why the gold price will increase to $1000. When most analysts make predictions about the gold price they talk about jewelry demand, producer hedging, central bank sales and mine supply. However, when one charts the relationship between these factors and the price of gold no relationship can be found. Rather, it is currency exchange rates that influence the price of gold.
The chart shows a very strong inverse relationship between the US dollar gold price and the US dollar exchange rate measured against a basket of major currencies. An obvious explanation for this is that since gold is quoted in US dollars, when the US dollar weakens more of it will be required to buy the same amount of gold.
This makes sense since gold has historically been considered money and, therefore, is affected by exchange rate changes like other currencies such as the Euro, Yen and Pound. Gold does not respond to supply and demand factors like other commodities and this is why most analysts make incorrect forecasts about the gold price.
To correctly forecast the theoretical US dollar price of gold we need to measure the inflation rates of the US dollar and gold. Paul Van Eeden has measured both and comes up with a theoretical price of $700/ounce (now updated to over $900/ounce). Moreover, if the US suffers a recession, as I expect, then the Federal Reserve will pump liquidity into the economy which will cause dollar inflation to accelerate and the theoretical gold price to rise beyond $1000/ounce.
In conclusion, the current gold price of $615/ounce is much less than its theoretical value of over $900/ounce. Since gold is so undervalued it is the safest investment I am aware of and it is where I have deployed most of my capital.