Gold has reached recent highs this week with an ounce of the stuff fetching over $1,300. While most Cincinnati area investors look to the obvious question of whether gold is a good investment and will its price continue to rise, a less obvious question is the why. Why is gold going up so much so quickly?
Gold is useless - at least practically speaking. While other precious metals are put to industrial uses such as platinum in catalytic converters and silver in photography, gold has comparatively little real use. To the twenty first century economy it is used only as a store of value; a place to keep your dollars when you don’t want to hold actual dollars.
Also, there is very little new gold coming onto the market. There hasn’t been a gold rush in quite some time. Mines do keep pulling it out of the ground, but it’s at a relatively slow and consistent rate.
Another way to think of the rise in price of gold is not that gold is getting more expensive in dollar terms (i.e. it takes more dollars to buy an ounce of gold), but that dollars are getting cheaper in gold terms - it’s taking less and less gold to buy more and more dollars.
What would make dollars cheaper? The most likely culprit is our Federal Reserve system. For several years the Fed has been pumping money into the system by buying up treasury securities and keeping interest rates low. There is a glut of dollars. Since there’s not as much gold being put into the system (and since gold isn’t being used for anything else), gold responds faster than other things to this glut. Gold becomes more expensive. Alternatively, dollars are becoming cheaper.
The situation of “cheap dollars” eventually leads to inflation. Gold is the canary in the inflation gold mine chirping away. Plan for it.
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