Where is the Price of Gold Going?
Sep 9, 2009
Posted by Jody Eisenman | Filed under Uncategorized
With a small amount of fanfare, the price of gold rallied above $1000 per ounce yesterday. This is the first time in history that this has happened. If you go back to the turn of the 21st century, gold was trading between 250-300/ounce pretty consistently. Gold cracked the $500 level in 2005, and has now soared to an all time high.
The price of gold has always been subjective. Although gold does have some practical uses in society, it has been primarily used as a hedge against potential political or economic turmoil. Gold does not have much inherent value in terms of price. When times get tough, people turn to gold. Therefore, it is somewhat surprising that as the world is seemingly coming out of the recession, the price of gold is soaring.
In a related story, Cheng Wei, a top Communist party member in China, has voiced dismay over the US monetary policy. China currently sits on the world’s largest reserves of approximately $2 trillion. Much of it is invested in the United States via treasury purchases. The reason for this is that China (as well as many countries in the world) feels that the US dollar is extremely stable compared to other currencies. However, there is concern over the tremendous amount of money that has been added to the economy under the Obama administration. This could eventually lead to a weakening of the dollar and/or inflation, which would be a big negative for foreign investors. There has been some speculation that China has been buying gold, which may have put a floor under the price. If you believe this scenario, then gold could be moving even higher. The question is what does this say about the future of the US economy?
On a more positive note, the powerful rally in stocks and bonds continues almost unabated. Every selloff in the stock market has been met with fresh rounds of buying. The bond market has simply been exploding, with new corporate issues continuing to be snapped up by investors. As discussed earlier, this resurge in the credit markets is a very important component in the health of the US economy, and has certainly helped the stock market.
