In times of economic mayhem there has almost always been a safe haven for individuals: gold and silver. But this particular stock market meltdown has caused the value of gold to depreciate. How is this happening?
It's simple. The "Hedge funds and high-net-worth investors are liquidating highly leveraged precious metals derivatives contracts, options, and gold index notes to raise the capital to meet margin calls on their tanking stock and bond investments," says Roberta C. Yafie of Portfolio magazine. Basically the financial crisis has forced these investors to eliminate gold and silver investments in order to balance the money lost in the volatile stock market. Prices for gold and silver are down, however, the investor demand for gold is high.
The big money is in gold, which is why investors are so fond of it now. "An Exchange-trade fund buys exposure to gold, and the price is right," says metal consultant at the CPM group, Jefferey Christian. "People three to four years ago bought them at $300, $400 an ounce and made a lot of money." Gold today is trading for more than $750 an ounce, according to Yafie. "Investors who bought a year ago, when the price was $780, are a little underwater," Christian adds. "Those who bought two years ago are in pig heaven."
As Comex Gold Trust and GLD E.T.F have increased gold holdings worth $17 billon and $2 billion, respectively, investors continue to sell and the price of gold is estimated to drop another $100. But experts say, according to Yafie, that after the short selling of gold ends, gold could shoot up to $1000 an ounce. Although the credit crunch has halted supply of gold, people are lining up to the buy gold the second the selling stops. When that happens, the price of gold will skyrocket because of the extremely high physical demand.
So what do you think America? Is gold a worthwhile wait and investment? Or is the risk too high?
On being Lucio Tan Jr.
5 years ago
2 comments:
Hi Brown Man, I've enjoyed trying to understand these comments, being rather similar in my understanding to you as you began this project. My question concerns the price of gold and precious metals: Why have they continued to retain value since currencies have been disconnected to them. Are they like any other item which can fluctuate wildly based on speculation, or is there a stable value connected to them?
Thanks!
Dear leslie,
Thank you for reading and commenting on my post. Those are excellent questions.
To answer you first question, actually currency is connected to the price of gold. According to Richard Sales, chief market strategist for InterMarket Forecasting, the price of gold is based on "the confidence (or lack thereof) markets place in the future value of each respective currency." As central banks issue surplus paper money to meet the demand, paper currency depreciates.
To answer your second question, the price of gold rises as the value of currency lowers, and as the confidence in paper money rises, the price of gold decreases. "A rising gold price is bearish for future inflation, interest rates, bonds and stocks; a falling gold price is bullish, in time, for all these things," Sales says. So gold will always have value as long as the economy survives.
Thank you
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