Theme by nostrich.
Gold is the basis for the monetary standard under the International Monetary Fund (IMF). It is used to back currency. Under the gold standard, a certain weight of gold was given the name of a unit of currency. The US government originally set the US dollar to 1 troy ounce=$20.67 in the 1800s. In 1934 President Franklin Roosevelt saw the need for gold to adjust for inflation. He forced US citizens to sell all of their gold back to the government at $20.67/ounce, then adjusted the price to $35.00, generating a 69.33% profit. This fraud is seen as the sole reason for emergence from the Great Depression. Currently under the IMF, it is measured at $739/troy ounce, or $23.8M per ton.
So you’ve likely seen the record prices of gold recently, with spot prices (the price that is quoted for immediate transaction and delivery) trading at above $800. The steep price is due in part to the US dollar’s decline against the Euro and other currencies. Gold is a dollar denominated commodity and, thus, benefits from dollar weakness.
Additionally, like all commodities, the price of gold is driven by supply and demand. Expectations that supply will tighten next year also adds to the high price of gold. Production in South African has already declined this year due to strikes and industrial accidents. The National Union of Miners in South Africa organized the country’s first national strike on Dec 3, resulting in total production losses estimated by analysts to be just under 19,000 ounces. Additionally, fears abound Russian output may be hit by delays of the issue of export licenses.
It has been said that gold is an inflation hedge. That is, in times of uncertainty, investors turn to gold to hedge against unforeseen disasters.
The recent aggregate increase in crude oil has also weighed heavily upon gold, as well. Strong energy prices beget strong precious metals.
But why do we care about gold? It is not a consumable commodity like wheat or corn, nor is it necessary for economic production, as is oil and natural gas. Sure it’s soft, shiny, and, well, gold and it looks pretty in jewelry. But it’s not going anywhere. If the central banks were starting from scratch right now, I suspect they wouldn’t even buy the metal. In 1992 the Economist called gold “the spent fuel of an obsolete monetary system.” But who am I to judge?
