Why Is Gold So High Right Now?
Why is the price of gold continuing to rise? Why, if the fundamentals are low enough to be negative, are the prices of some commodities skyrocketing? Gold has actually reached $1007 an ounce, the highest it has been since March 2008. That means there has been a 12% increase since April 2008.
But what causes this to happen? Certainly not the fundamentals, as you might have guessed. According to data gathered by the World Gold Council, demand for gold jewelry is down 22% and gold use in industrial processes is down 21% from 2008. Only financial speculation flourished in today's gold market, as it saw a 46% increase earlier in the year.
Another reason is that gold is often considered to be a good hedge against inflation leading many to be attracted to this precious metal. But according to statistics listed by the Labor Department, the consumer price index for gold fell 2.1% in a single year. That is the opposite of inflation. So what exactly is being hedged against?
Because the Federal balance sheet is getting larger, the currency it is based on is losing it's value. Deflation will only cause our currency to further lose it's value, and inflation is not a pleasant option; it appears that either way things go, gold will benefit.
Another factor in support of gold is how low the current US interest rates are. The method by which banks charge other banks for loans, known as the London interbank dollar rate, has fallen 4.8% since October of last year to an unprecedented 0.314%. Because you do not earn interest by having gold, you have something known as an opportunity cost which you do not have with any other form of investment, such as bonds. However, given the current value of the dollar, the opportunity cost of having gold as opposed to bonds is insignificant.
What this means is that the fundamentals have absolutely nothing to do with the high price of gold; it is dependent solely upon financial speculation. This means that there is absolutely no way to know what is going to happen to the price of gold in the future. - 23167
But what causes this to happen? Certainly not the fundamentals, as you might have guessed. According to data gathered by the World Gold Council, demand for gold jewelry is down 22% and gold use in industrial processes is down 21% from 2008. Only financial speculation flourished in today's gold market, as it saw a 46% increase earlier in the year.
Another reason is that gold is often considered to be a good hedge against inflation leading many to be attracted to this precious metal. But according to statistics listed by the Labor Department, the consumer price index for gold fell 2.1% in a single year. That is the opposite of inflation. So what exactly is being hedged against?
Because the Federal balance sheet is getting larger, the currency it is based on is losing it's value. Deflation will only cause our currency to further lose it's value, and inflation is not a pleasant option; it appears that either way things go, gold will benefit.
Another factor in support of gold is how low the current US interest rates are. The method by which banks charge other banks for loans, known as the London interbank dollar rate, has fallen 4.8% since October of last year to an unprecedented 0.314%. Because you do not earn interest by having gold, you have something known as an opportunity cost which you do not have with any other form of investment, such as bonds. However, given the current value of the dollar, the opportunity cost of having gold as opposed to bonds is insignificant.
What this means is that the fundamentals have absolutely nothing to do with the high price of gold; it is dependent solely upon financial speculation. This means that there is absolutely no way to know what is going to happen to the price of gold in the future. - 23167
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posted by X - Men @ 5:45 AM
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