Why Is Gold So High Right Now?

What are the reasons behind the high gold costs we are witnessing? Why do certain assets rise to astonishing highs when the basics remain low? In the past twelve months gold has risen to $1,007 per ounce, which is its highest point between March, 2008 and now. Gold has seen a 12% increase in the intervening months.

What are the reasons for this? You might be tempted to think its because of the basics, but its not. The World Gold Council published a report that states craving for gold accessories has declined by 22% and industrial uses for gold has declined by 21% since 2008. The only component that has remained high in the current gold arena is speculation, which has grown by 46%.

In addition, gold is thought to be a way to fight inflation, which is why a lot of people are drawn to this commodity. However, when looking at specific data published by the Department of Labor, the Gold Consumer Price Index dropped by 2.1% in twelve months. This indicates that inflation has not occurred. You might be wondering what people are worried about then.

Because the Federal balance sheet is getting larger, the currency it is based on is losing it’s value. Deflation will only cause our currency to further lose it’s value, and inflation is not a pleasant option; it appears that either way things go, gold will benefit.

The US interest rates are low which is also a large factor when it comes to supporting gold. Consider the London interbank dollar rate (which is the method used by banks to charge other banks for loans) that has fallen to an unprecedented low of 0.314%, meaning it is down from 4.8% in October of last year. Unlike bonds, gold does not earn interest, which means there is an opportunity cost associated with having gold. But with the dollar worth as little as it is now that opportunity cost is rendered insignificant.

All signs point to financial speculation being behind the surge in gold prices and nothing to do with the fundamentals. Gold prices are high and it is impossible to predict what will happen from here.

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