What’s Up With Gold?

by Dual Income No Kids on November 18, 2008 · 0 comments

Hi All,

Gold. Ah gold. Gold has been used as a store of value and a currency since humanity first started keeping historical records. More recently there has been a lot of demand for the yellow metal driven by increasing government debt and heightened economic uncertainty. Despite this, the price for gold on international trading exchanges has gone down, leading some to scratch their heads.

According to the NY Post -not exactly a journalistic powerhouse – the Feds are having a hard time making enough gold coins to keep up with demand (here). But at the same time, the price of gold appears to be going down. Why? Well there are a few reasons.

1) Inflation is relatively low. Prices are down 3% from where they were a year ago (1). Gold has often been used a hedge against inflation so with inflation pressures easing, there is less interest in the metal on the part of buyers.

2) The dollar is strengthening. In the past few months, the dollar has been strengthening against other currencies. When the dollar is strong, gold prices tend to decline.

3) Disconnect between the “paper market” and physical supply. There are a number of different ways to buy gold these days. Its possible to purchase exchange traded fund shares, dabble in futures and options, buy and sell leases on physical holdings of metal, etc etc. For understandable reasons, many of these are removed from the supply constraint of the actual metal itself. Thus, the diversity of ways to invest in gold suggests that its price may be at least partially divorced from the supply of the physical metal. Simple, put the big money boys who deal in paper aren’t buying gold.

So, to quickly sum up, the price of gold is going down due a combination of weak inflation, a strengthening dollar and market sentiment regarding the value of the metal. The demand for physical gold simply doesn’t have as much impact on prices as these other macro-economic forces.

Personally we DINKs have a couple of ounces of gold safely stashed. Some of artwork on the coins is rather fun and a bit of exposure to precious metals isn’t a bad idea.

Best,

James

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