How the “multiplier effect” could push gold prices to $10,000 or higher.

As I have mentioned in previous posts, gold is unique among investment vehicles because of its scarcity.

Most investments, like stocks, bonds and real estate can respond to a sudden increase in demand.

For example, if there is a surge in demand for residential real estate (not likely right now), more and more homes can be built to satisfy that demand.

But that isn’t the case with gold. Increased demand can’t be absorbed by an immediate increase in production. It’s hard to get gold out of the ground, and there is no way to meet a sudden, large increase in demand.

With any commodity, when demand suddenly rises, if supply doesn’t rise to match that demand, then the price of the commodity rises. More and more people are after a small amount of available gold, and the price goes up.

Now consider this…if investors wanted to move just 1 percent of the world’s stocks and 1 percent of the world’s sovereign bonds into gold, that would equal an movement of approximately $1 trillion.

Now for the kicker.

That $1 trillion would represent more than 20 times all the gold supplied in 2009.

In other words, there is not enough gold available for that 1 percent transfer to take place. Unless, of course, the price of gold per ounce were to rise dramatically.

This is called the multiplier effect, and because of gold’s scarcity, it can have a huge impact on prices.

Of course, for this multiplier effect to kick in, investors would have to want to move 1 percent of their holdings into gold.

Could this happen? Well, if there were ever a time when investors around the world might want to put 1% of their wealth into gold, it’s now. Economic conditions around the world are bleak, to say the least.

There is bad news all over Europe, and the U.S. seems unable to deal with its debt problems.

In other words, big investors in both stocks and sovereign bonds could very well become nervous and decide to transfer some of their money into something safer, like gold.

And it would take even less than a 1 percent transfer for that multiplier effect to kick in and cause the price of gold to leap.

If you don’t own gold, and feel pessimistic about the state of the economy, the time to buy gold is now, before big investors trigger the multiplier effect with their own gold purchases.