Thursday, November 12, 2009

Why the Gold Price Increase to $1,120 an Ounce?

Gold has been surging like we haven't seen it surge for years. This increase is significant because it continually reaches all-time highs, which today, has gold at $1120 per ounce.

The white metals are all well below their all-time highs, but are still following gold up the ladder: platinum is at $1370 per ounce, 60% of its all-time high. Palladium is at $350 per oz, 32% of its all-time high. And silver is trading at $17.50 per ounce, 35% of its all-time high.

Unlike gold, the white metals are used in manufacturing and used up. With the recessed economy they aren't in high demand, so their price jumps are not industrial, but rather, they're following gold as hedges.

Now let's look at some of the reasons gold has risen to $1120 an ounce.


Central banks are buying gold. Most notably India. Last week the central bank of India bought 200 tons of gold from the International Monetary Fund (IMF). India is reported to want to diversify it's financial hedges. The sale was an alleged US $6.7 billion.

Central Banks

Several other central banks are reported to be buying gold to hedge against the risks of a falling dollar. Sri Lanka and China are on the list, amongst others. These purchases not only increase the gold price, but influence individual investors as well.

Since buying has begun, it may continue, thus making investors rush to buy before the price increases more. This interest may shoot gold well past anticipated levels due to overbuying.

Matt Zeman of LaSalle Futures Group Inc. is quoted as saying, "The interest that central banks have shown for gold has really lit a fire under the market...People are questioning the value of not only the U.S. currency, but all paper currencis. Investors are moe comfortable holding gold" (cited by Ngyuen and Larkin).


A simple report by the Chinese government saying it will start buying gold is enough to shoot the price up another $100 or more. A swift upturn in the Chinese economy would have a similar, yet softer effect.

Falling Dollar

If the dollar falls, the price of gold will go up in dollar terms. However, if the dollar falls, since many other countries hold US debt, gold will rise in terms of other currencies as well.

The dollar has reached a 15-month low on the dollar index. This index compares the performance of the dollar against other main currencies. This shows some of the reason for gold's surge, however, gold is also at an all-time high measured in euros. It's currently trading at around 750 euros per ounce.


The world is worried about the dollar. With the trillions of dollars spent this year in bailouts and stimulus packages, the dollar is being printed like never before. The Fed is hoping this will stimulate the economy, and it may, but it will also likely cause inflation.

John Hathaway of Tocqueville Gold Fund is quoted as saying, "Would they be able to retract the liquidity they put into place?...If they havce a hard time doing it, I htink we'll see inflation, and gold will go much higher (cited by Ngyuen and Larkin).

And again, it's not only the inflation that's causing the gold to go higher, it's also the anticipation of future inflation causing investors to hedge now before prices go higher.

Interest Rates

The Fed has kept interest rates low in hope of sparking the economy. Low interest rates means cheap loans for housing and month thrown back into the economy.

Zeman says, "The dollar is not going to get any firm footing with rates at zero...People are selling dollars and putting it in higher-yielding assest. All commodities are going higher" cited by Ngyuen and Larkin).

Goldman Sachs thinks that gold will reach $1200 with rates as they are. Also, since people are thinking rates will stay low longer, they're anticipating gold to go higher and buying more, thus increasing the gold price even more.

"Analysts said the dollar was smarting after Fed officials said on Tuesday that high unemployment and sluggish consumer spending were risks to recovery in the U.S. economy, which may keep the Fed funds rate low" (Tang and Harvey).

Other Factors

There are too many factors to list, but above are the main ones. Some others include the opening of the gold market back into Vietnam, spurred by investor demand. It was previously illegal to import gold into Vietnam.

The Chinese government has reportly encouraged citizen's to buy gold to hedge for inflation.

Gold Fields gold producer in South Africa is going on a labor strike. This just means less new gold coming out of the ground to sell.

* * *


Godt, Nick and Lesova, Polya. "Gold Hit Record Near $1,120 an Ounce." MarketWatch. November 11, 2009.

Tang, Frank and Harvey, Jan. "Gold Rises Towards $1,120 on Strong Sentiment." Reuters. November 11, 2009.

Nguyen, Pham-Duy and Larkin, Nicholas. "Gold Futures Rise to Record on Speculation Dollar Will Decline." November 11, 2009.

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