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Why are Gold Prices so High?

Even those not familiar with the jewelry industry know that gold prices continue to soar. But many don’t understand why, consider the economic woes that have befallen the US and other countries throughout the world. This piece from CBS’s MoneyWatch addresses some of the basics and reminds us that gold prices and our economy are intrinsically intertwined:

  • Geopolitical uncertainty. Between the fighting in Libya that threatens the stability of the world oil supply, the political upheaval in Egypt, Japan’s struggle to get its economic engine moving in the wake of the Fukushima earthquake and tsunami, and the sovereign debt crisis that bedevils the European Union — Portugal just officially asked for an EU bailout — we’ve got a confluence of worries. In isolation, each might be more easily absorbed, but in aggregate they ratchet up the global blood pressure, and that’s when gold becomes most alluring.
  • The U.S. isn’t exactly a roaring safe haven. Typically in times of global angst, money flows to U.S. investments. When the financial crisis hit in the fall of 2008, for example, the U.S. dollar strengthened against foreign currencies. But with our debt load causing many to worry about higher inflation and a lower dollar in the future, the U.S. is losing some of its safe-haven luster, making gold look all the better.
  • Where else are you going to park your money? A Treasury bill yielding less than 0.50 percent isn’t exactly crowding out gold right now. Part of gold’s popularity is being driven by a lack of better investment opportunities.
  • Fears of higher inflation. Gold is a classic hedge against higher inflation and a weakening dollar, since it holds its purchasing power when the dollar’s value declines. And right now, concerns about inflation are beginning to creep back into the global economic dialogue. While the Federal Reserve is grappling with whether it needs to respond to a rise in inflation in the coming months, the European Central Bank (ECB) pulled the trigger yesterday by raising its benchmark interest rate for the first time in three years, from a record low of 1 percent to 1.25 percent. Sure, that’s still low, but the concern is where things might head from here.