Prospectors Piling Onto Gold's Bandwagon, But Fundamentals Remain Strong

There are plenty of analysts who believe that gold prices will continue to rise, and some (such as Jim Sinclair and Chintan Karnani) see the possibility of $1,450-$1,600 early next year.

Many people view gold as a store of value. Central banks cannot print it out of thin air. And it cannot be devalued at will by governments to pay off their debts more cheaply, as a currency can.

However, other people are jumping on the gold bandwagon as a means of making money. And there are reasonable concerns about the rapid influx of retail investors into the gold market. The sudden increase of these gold prospectors has helped to drive up prices.

These investors are not buying gold as a hedge, or as an insurance policy to protect them from exposure to dollars or other fiat currencies. Rather, they are buying gold with the hope of eventually cashing out and taking their profits in the form of even more dollars.

They are the last to invest in any bull market and the first to exit. And right now, these investors have started buying gold all over the world. Mutual funds and ETFs have also increased their allocation of gold.

Given that, a significant correction from gold's highs could be imminent. But at some point thereafter, gold should continue its ascent because of the instability of fiat currencies and the size of sovereign debts.

The possibility of a currency collapse is a very scary, yet quite realistic, prospect. All fiat currencies are under great duress. Sovereign debts are massive and unsustainable. Gold's continuing rise is a sign of the instability in the dollar, of global stock markets, and in the bond markets.

Central banks don't like gold because they can't print it at will, and they can't control it. They had previously been dumping gold on world markets in an effort to keep prices suppressed. However, they've recently changed course.

Over the past 12 months, the IMF and central banks have reportedly sold the smallest amount of gold since an agreement to cap gold sales was put in place in 1999.

As Europe continues to reel from its sovereign-debt crisis, central banks there and elsewhere have stopped selling gold. Instead, they're now buying.

Central banks account for about 20% of above-ground gold in the world, and fewer sales mean gold supplies are likely to continue to lag demand, boosting prices in the long term.

And that's what's important to those who own gold due their legitimate concerns about unstable fiat currencies and unsustainable sovereign debts.