Analysts predicted that gold prices is expected to raise further at least for the next one year before the gains are capped, given the economic uncertainties in advanced nations and the volatility of the US dollar.
Spot gold broke past US$1,400 an ounce on Friday for the first time since Nov 9 after data showed US jobless rate unexpectedly hit a seven-month high. Gold price raise 29% year-to-date
Today, the world is experimenting with a total fiat money system. That is, paper and electronic money that are not redeemable for gold or anything of value, unlike in the past. Accordingly, the world has observed countless economic and monetary crises worldwide, with the current global crisis being the latest and most severe since World War II.
The reason why the world adopted a total fiat monetary system was not grounded in economics but rather, in politics. Money, when not redeemable for gold, gives immense benefit to those who issue it and use it for the first time – that is the rationale for why counterfeiting is illegal. Today, most money is issued by commercial banks in the form of mere accounting entries when they give out loans, thereby enormously benefiting bankers from the first use of money that is created out of thin air.
Gold prices have been rising sharply, breaching the US$1,000 barrier and in recent weeks rising towards US$1,200 an ounce and above. Today’s “gold bugs” argue that the price could top US$2,000. But the recent price surge looks suspiciously like a bubble, with the increase only partly justified by economic fundamentals.
Gold prices rise sharply only in two situations: when inflation is high and rising, gold becomes a hedge against inflation, and when there is a risk of a near depression and investors fear for the security of their bank deposits, gold becomes a safe haven.
Gold is king, going by the strength of its price, which was trading above US$1,200 an ounce after getting a boost from Barrick Gold Corp’s move to eliminate its hedge positions against declines in gold prices. Barrick is the world’s biggest gold producer.
The company had sold forward its gold and as such, did not benefit from any increase the gold price. Barrick said its positive view on the gold price prompted it to accelerate the elimination of these contracts ahead of schedule.
Gold has risen close to 40% this year amidst US dollar weakness, central bank buying and investor interest in a low interest rate environment. The greenback has fallen 8.7% against a basket of six major currencies, while the US Federal Reserve has kept the federal funds rate at close to zero since December 2008.
What is the real value of gold? Gold has industrial uses, especially in the electronics industry where it is used for electrical wiring due to its high conductivity. However, close to two-thirds of its demand is for jewellery, particularly in India and China.
Increasingly, it is being used again as a store of wealth as investors lose confidence in paper money, hedge against inflation or worry about economic and political turmoils. Other than buying physical gold, investors can invest in gold exchange traded funds (ETFs). SPDR Gold Trust, the largest gold ETF with a market capitalisation of over US$41bil, holds over 1,100 tonnes of gold.