What causes the surging gold prices we see? How can some commodities soar to staggeringly high prices when the fundamentals are in the negative? This year gold reached $1007 an ounce, the highest price of gold since March of 2008. This means gold has risen 12% since April.
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.
The US interest rates are low which is also a large factor when it comes to supporting gold. Consider the London interbank dollar rate (which is the method used by banks to charge other banks for loans) that has fallen to an unprecedented low of 0.314%, meaning it is down from 4.8% in October of last year. Unlike bonds, gold does not earn interest, which means there is an opportunity cost associated with having gold. But with the dollar worth as little as it is now that opportunity cost is rendered insignificant.
So, it seems pretty apparent that financial theory is the main cause of the increase in gold costs, and the basics really don't have anything to do with it. Gold prices are currently immense, but there's no way to know what's going to occur in the future. - 29969
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.
The US interest rates are low which is also a large factor when it comes to supporting gold. Consider the London interbank dollar rate (which is the method used by banks to charge other banks for loans) that has fallen to an unprecedented low of 0.314%, meaning it is down from 4.8% in October of last year. Unlike bonds, gold does not earn interest, which means there is an opportunity cost associated with having gold. But with the dollar worth as little as it is now that opportunity cost is rendered insignificant.
So, it seems pretty apparent that financial theory is the main cause of the increase in gold costs, and the basics really don't have anything to do with it. Gold prices are currently immense, but there's no way to know what's going to occur in the future. - 29969
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