I would appreciate it if some of you could answer this for me. Even though it may sound like a silly question to some of you, I really would like to understand the logic, and intuitively know why this happens: I know that the US$ is weakening. Which is causing the price of gold to rise. Why is this? Are the prices of other commodities also rising for the same reason(s)? Was all of this started by the “credit crunch”? I’ve googled this but can’t seem to find a good answer that tells WHY this is happening. Any weblinks that can clear this up are also appreciated! Thanks!
http://info.nbfinancial.com/fbn/cda/content/0,1114,divId-2_langId-1_navCode-7150,00.html Check out “Economic weekly”.
think of gold as a currency. when the USD falls, it takes more USD to buy gold.
gold is an inflatrion hedge, as inflation looms ppl buy gold (its a bit silly but has always been like that) other commodities (minerals like copper, cobalt) and precious metals (platinum etc) are majoritively driven by industrial supply and demand situation, and a bit by speculation
for some reason people think the shiny piece of metal has some intrinsic qualities that make it a safe asset to hold in times of inflation and currency devaluation. some of those people even want to go back to the gold standard, hah.
MFE Wrote: ------------------------------------------------------- > think of gold as a currency. when the USD falls, > it takes more USD to buy gold. so does that drive up demand for gold? and thx for all the help! ill be looking at those links. any one else wanna clear it up a bit more?
Don’t forget emerging middle classes in China and India want to show off their new wealth. In some parts of India, elders are supposed to accumulate gold to distribute to heirs on their deaths in order to show a) success and b) generosity. And when things go to pot, gold is a portable currency. Everyone should have a little gold outside of the monetary system for emergencies, silver too. You don’t want to be giving away your Canadian Maple Leaf coins for a quart of milk if NY gets nuked, just because you don’t have change.
Mez Wrote: ------------------------------------------------------- > MFE Wrote: > -------------------------------------------------- > ----- > > think of gold as a currency. when the USD > falls, > > it takes more USD to buy gold. > > so does that drive up demand for gold? > > and thx for all the help! ill be looking at those > links. any one else wanna clear it up a bit more? Simple Example: 5 years ago: 1 USD = 1 Euro Gold = $500/oz Gold = 500 Euro’s / oz if today: .75 Euro = 1 USD Gold = 500 Euro’s/oz then how much USD to buy 1 oz of gold? 500/.75 = $667 / oz. If many believe USD is going to get weaker in the future and concerned about inflation, many use gold as a “safe” way to retain value (i do not endorse). This could drive demand.
SeanC Wrote: ------------------------------------------------------- > for some reason people think the shiny piece of metal has some intrinsic > qualities that make it a safe asset to hold in times of inflation and > currency devaluation. > > some of those people even want to go back to the > gold standard, hah. indeed, Congressman Ron Paul who is seeking the GOP nomination for the presidency of the United States and who has (unsuccessfully) introduced legislation in the past to abolish the Fed. Return to a dollar “as good as gold” and inflation will be a thing of the past. As others have said, gold can be regarded as a currency,
I believe that gold denominated in any currency has risen over the last year so it’s not just dollar depreciation driving it. I think gold is a lousy inflation hedge, although I have heard that a lot. I think the rise in gold is due to a few factors: a) Loss of confidence in the dollar as reserve currency. The world holds lots of dollars but the dollar has done poorly and the US govt keeps making dumb statements that make the US look unstable (e.g., W’s recent comment about WW III and Iran). b) Demand from a new middle class in China, India, and others. They suddenly have money and think gold is worth something. Whenever a new class emerges the old guard sells them the stuff they are tired of. c) Technical stuff. Those late-night infomercials only sell gold and the idea that gold has sky-rocketed is working getting more people to buy it. d) Nutty stuff like bchadwick wrote above (which isn’t to say that bchadwick is a nut). In a nuclear war, would gold really be valuable? I’m stocking up ammo, MRE’s, and condoms for currency.
OK, I talked about nukes to be dramatic, but in places like Iraq, I’m sure that gold is a highly prized medium of exchange. Dollars may turn out to be counterfeit, and dinars may inflate without notice, or be difficult to exchange abroad. Gold is also a store of value for organizations engaged in illegal activities, like drug cartels and Al Qaeda. Indeed, since financial tracking and freezing institutinally held assets is one of the main methods used by the west to track and counter Al Qaeda, they have specifically begun to use gold as a method of accounting. Makes me wonder if that’s enough to affect demand and the price. If so, that would be disturbing. Also in many countries, gold is a useful medium for bribery and granting of political favors. I’m pretty sure that in petro-rich nations, there is a long cultural tradition of using gold in such ways (which may not just be bribery, but also includes normal political favors). In the US and industrialized regions, gold is not a big exchange medium, but in developing areas, it is much more prevalent. I was struck by how many gold merchants I found in cities in the Amazon. Of course, some of that is because the Tocantins area of Brazil is a major gold producing center, but clearly a lot of illegal stuff is transacted with gold.
Exactly bchadwick, in the middle east, gold is widely used as a medium of exchange, ESPECIALLY in Iraq for the reasons you mentioned. and zigy, that article was fantastic. it really cleared up A LOT of things. thanks again for the link.
you are taking quite an intellectual short cut assimilating all of the ME to Iraq: do you really think that the guys in the Emirates are using gold as mediump of exchange? get real and get out opf you place more often
my bad, i just re-read my post and noticed i made a mistake by saying “middle east”, meant to write “iraq”. It was 1:30AM, cant blame me
I know from colleagues who are middle east specialists that gold is widely used as a secondary exchange medium in the middle east. However, outside of Iraq, I don’t have any idea about how the scale of flows compares to other currency and asset flows. I do know, however, that it is much more frequent to contract and settle payments in gold than one would think by just assuming those regions are like the US, Europe, and Japan. So, I think, Gold becomes a useful portable currency in environments where you are nervous that paper money may not be trustworthy and financial institutions are either untrustworthy or likely to be monitored by unfriendly parties (which doesn’t necessarily mean the entire middle east is like that, but there is a history of being careful about these things over there that over time may become part of the culture). Joey, I was interested in your comment about gold being a terrible inflation hedge. I assume that’s because gold (like most commodities) is not a productive asset, in the sense of producing future cash flows. Presumably, you would rather use TIPS for inflation hedging, perhaps combined with forward currency contracts, if you are hedging against non-US inflation?
well if you need to consult your ME specialist it might be that I know more about the region than you do (everybody having its speciality): in the Gulf states (thats where the big transactions take place) and in countries like Egypt, Jordania etc as well as in the North African countries Morocco, Algeria etc settlement in gold is rather the awkward exception of non-routine transactors, normal contracts are settled in paper as they have no reason to distrust their financial institutions
I used to think gold is a silly commodity to invest in. I still think it’s pretty silly to sit on the shiny metal. However, I think differently about mining stocks, especially warrants of mining stocks, that offer lots of upside with not nearly as much downside. ALso, I finally got a good funamental lesson on gold supply & demand when I read a Merrill Lynch initiation of coverage report on Yamana gold… only about 14-16% of gold demand is accounted for by those “gold hoarders”, ie people who buy gold as a currency alternative/for fear of inflation. Lastly, when I read how the U.S. put the screws on countries like Korea by freezing their financial assets, I see that as a HUGE catalyst for further increase of the “currency” value of gold…
If only ~15% accounted for by fear of inflation, etc… where does the other 85% come from? consumer demand from countries like india and china?
The report I remember this from is 2 years old. I just logged in to see if I could find it and they don’t have it on the site anymore. However, I don’t remember any one particular segment of demand? I do remember thinking that the “hoarders” are the marginal consumers, thus setting the price.