Why Gold Prices Are Through the Roof

International investors got bitten by the gold bug, driving prices above a record $1100 per ounce

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Wedding-ring shoppers, Fort Knox accountants, and exhilarated investors all know that gold prices are hovering around a record high $1100 per ounce. (Though that's not a record when adjusted for inflation.) Why is the ductile yellow metal all the rage? One major short-term cause is that India's central bank bought nearly $7 billion of the stuff last week. But the surge's bigger cause, analysts think, is a broader migration away from the dollar, which is near its low for the year. (The Wire covered concerns about the dollar's status as international currency here and here.) Could gold be the next big bubble?

  • Fed's Driving the World to Gold, writes Dan Burrows at Daily Finance. "As long as the Federal Reserve continues to print money with a zero interest-rate policy, it's only wise for other nations to purge rapidly depreciating dollars from their foreign exchange reserves and go gaga for gold. The yellow metal is, after all, the ultimate hedge against inflation. As much as there's always been something slightly goofy, if not outright kooky, about gold bugs, you've got to hand it to them these days. Gold has soared about 50% in the last 52 weeks, while the dollar has dropped about 15%."
  • Looks a Bit Like a Bubble, writes Darwin at Darwin's Finance. "When the pitches on TV for selling gold for cash are running around the clock like they are now, doesn't it make you wonder whether we've reached bubble territory? Sounds similar to home flipping frenzy and the internet bubble news cycle to me. Often times, by the time main street is talking about a hot trend, the smart money is already on the way out and newcomers are left holding the bag when the bubble bursts....anyone buying gold now thinking they're buying something of increasing intrinsic value somehow is fooling themselves. Gold is actually flat or declining in terms of other currencies and just because you may live in the US, do you want to continue to plow your money into a flat useless asset? If you feel the currency will continue to depreciate, there are more effective means to invest in that trend"
  • Struggle to Wrest Power From Bankers, writes William Rees-Mogg at the Times of London. "The significance of the purchase is that it may be the start of a new phase in the struggle between gold and paper...The real struggle between gold and paper is a struggle for power. If paper money is the dominant form of currency, as it is at present, then the ultimate governors of the world economic system are the bankers who have the power to create money. If, however, gold is regarded as the ultimate standard, as "real money", then the market decides the valuation"
  • Gold Looking as Good as Stocks, says W.C. Varones at Polipundit. "With an ounce of gold and the S&P 500 coincidentally about equal at 1100 now, I thought it would be instructive to look at where they've come from... Gold averaged about $390 per ounce in 1994, while the S&P 500 averaged about 460 in 1994. In other words, the S&P 500 was worth 1.18 ounces of gold. Fifteen years later, the S&P has fallen to 1 ounce of gold, meaning it's lost 15% of its value over that time...In a fiat currency regime, gold is one asset class that Zimbabwe Ben Bernanke and Trillion-Dolla Obama can't debase."
This article is from the archive of our partner The Wire.