Social Question

Jellie's avatar

Why is the value of gold rising the way it is and continues to rise?

Asked by Jellie (6474 points ) September 6th, 2011

I understand the valuation and devaluation of currency, property, shares etc.
I don’t know what factors are the driving force behind the continued increase in the value of gold. I assume it has something to do with increase in demand and/or decrease in supply…
Can anyone help?

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44 Answers

zensky's avatar

In a nutshell, when currencies become less stable – people turn to tangible things they can “trust.” People invest in gold (stock) because it has gone up consistently for many, many years and people buy actual gold because they think they can trust something they own and can feel in their hands. Historically, it has always been this way.

bobbinhood's avatar

Essentially, if paper currency becomes useless, gold will still have value. Therefore, the less people trust the currency, the more interested they are in something that has inherent value.

My husband and I would have stocked up on gold a few years ago if we could have afforded it. As it is, we just get to hope that our savings aren’t becoming useless.

Jellie's avatar

Why is paper currency becoming useless? As in inflation?

marinelife's avatar

Fear. People are afraid that the economy will collapse, and they believe that gold is something they can physically own and touch that will retain its value.

CaptainHarley's avatar

When the Federal Reserve prints money, they do so without it having any backing other than the government SAYING that it’s money. This is called “fiat” money. When people begin to lose confidence in the money ( usually because the government tries to print too much of it ), they look for a safe place to invest and store their money… thus gold, silver, and other precious metals.

The Federal Reserve has recently had two so-called Quantative Easings wherein they print billions ( or TRILLIONS ) of dollars of this “money-because-we-say-it’s-money.” Right now, they are contemplating Quantitative Easing 3 ( QE3). This is tatamount to stealing money from the public, since inflation makes money worth less and less. In Germany, after WWI, the curreny became so worthless that it took a barrel full of money just to buy a loaf of bread!

All of this comes about because politicians are constantly making promises to get re-elected, promises which costs trillions of dollars, but they have nothing to pay for it with except fiat money.

CaptainHarley's avatar

Welcome. It’s kinda frightening, especially in the short run. Most forms of saving will be severely devalued, as will most people’s earnings.

Jellie's avatar

I do keep hearing in the news that we should not be investing in any currency. I would love to invest in gold but I can’t afford even a single biscuit!

zenvelo's avatar

A good deal of the increase in gold is that the Standard and Poor’s Depository Receipt Gold Fund now has almost 40 million ounces in trust. This is a huge increase in gold investment over the last five years.

The gold price rise is mostly fear based rather than reality based. If inflation was really looming on the horizon, interest rates would not be as low as they are now.

CaptainHarley's avatar

Interest rates are set by The Federal Reserve, the same people who print all the worthless money.

dappled_leaves's avatar

I’m not sure why an investment in gold makes people feel any safer than simply having currency. I could see feeling safer if they have the gold buried in their own backyard or something, but… isn’t paper money basically an investment in gold anyway? The whole thing seems vaguely silly to me.

CaptainHarley's avatar

You ignore it at your peril. Gold holds its value, money does not. US currency is NOT backed by either gold or anything else except the government statement that “this is money.”

As to holding the actual metal, many, many people have gold and silver stored in their homes or elsewhere nearby.

CaptainHarley's avatar

What IS “inflation” actually? Nothing more than too much money chasing too few goods. When the government prints money, there is nothing backing it up, so there’s just more and more paper money for the same amount of goods and services as there were before. Thus the price goes up.

dappled_leaves's avatar

But the value of gold is also based on a statement that “this has worth”. You can’t eat it, or build a house with it, or drive it down a street. It has no intrinsic value – only a speculative value, just like currency. The only reason people value gold is that they always have – right back to when it was first pulled out of the ground and people thought it was shiny and pretty.

CaptainHarley's avatar

Gold has a multitude of industial and electronic uses, and is used in many decorative and artistic forms. One of the primary reasons for the value of gold is scarcity. This is true of many things, from precious stones and metals to highly valued artwork.

john65pennington's avatar

Pawn Stars was on cable last night. This lady came in with a genuine article belonging to Elvis. She had photos and paperwork to back her claim of being an authentic item.

It was a gold necklace given to her from Elvis and weighed 10 pounds!

She was asking $400,000.00 dollars for the necklace, but did not reveive it. The most offered to her was $20,000.00 dollars.

She took her gold chain and left and I do not blame her.

gondwanalon's avatar

What is most surprising to me is the rate at which the price of gold is raising. In the year 2000 one once of gold was worth $278USD. This is a bad sign for the economy in general now and the future.

tedd's avatar

The value of gold as it is often talked about, is an ironic number. Gold is trading at above $1900 an ounce on the market. Notice I said “on the market”, not “in stores.” Gold, like other metals and commodities, are also traded like stocks on the stock market. When the economic outlook is bad people (more specifically traders) sell their stock in companies and flood into “safe” stocks. Safe stocks typically include stable governments’ bonds and commodities like Gold, Silver, and Platinum. The thought is that these “stocks” won’t lose value, and people will flood to them seeking their safety. (it’s worth noting that for all the crap the US treasury bond gets, even after it was downgraded traders still RUSHED to buy them).

When you see the price of gold balloon you have all the day traders selling stocks in businesses and buying stocks in gold because they know its going to go up, and then when it begins to decline they will sell to turn a huge profit (based entirely upon the fear of the common man).

The biggest irony that people don’t seem to understand with this “gold costs $1900 an ounce” issue… is that when you buy an ounce of gold and help fuel that price, you’re not going to get an ounce of gold… You’re going to get a piece of paper (or an online statement more likely) that says you own X ounces of gold. Your likely reason for buying gold was the fear that the US dollar will collapse, and if your worst fear is realized… you won’t have any gold, just a useless piece of paper telling you you own X ounces of gold. And if you were smart enough to buy an actual ounce of gold based on your economic fears, it wouldn’t contribute to the increase in price at all.

dappled_leaves's avatar

That’s exactly what I’m saying though not as well.

gondwanalon's avatar

@john65pennington 10 pounds of pure gold had a melt down value of over 3 million $‘s. The neckless is likely not pure gold but since it came from Elvis the lady was giving it away for $400,000.

@tedd You are right about paper gold. It is far better to own the real thing and hold possession of it yourself.

CaptainHarley's avatar

@tedd This is not true. I myself hold gold, and it is actual gold, not a piece of paper.

tedd's avatar

@CaptainHarley Then you purchased actual gold, which if the economic apocalypse comes, wonderful you are set. But it didn’t contribute to the increased price of the stock one bit. If you had purchased a “share” of gold, they would not have sent you actual gold.

john65pennington's avatar

Elvis’s gold necklace was tested as 14 kt. gold. And, this lady was walking around as though it were a trinket from a Cracker Jacks box.

CaptainHarley's avatar

@tedd

“But it didn’t contribute to the increased price of the stock one bit.” Huh? I must have missed something.

And, IMHO, it’s not “if” the financial apocolipse comes, but “when!” Right now, I’m predicting next year.

tedd's avatar

@CaptainHarley If you went out today and purchased 10 pounds of solid gold bricks from the pawn shop, it would not contribute towards an increase of the price of gold on the stock market. The “price” of gold listed on the stock market has limited, secondary at best, ties to the actual sale of real gold in everyday shops. What drives the market “price” of gold up is people buying “stocks” in gold, just as it would drive up the price of google if everyone suddenly decided to buy google stock. So as I pointed out, you owning actual gold that you bought from wherever, has no real effect on the stock market value of gold.

(in fact for that matter on the stock market people are over-valuing gold because it is considered a safe bet to not lose value from its base value. If I buy 100 stocks in company A, that stock could go down, and in an economic turmoil probably will. But 100 stocks of gold will never fall below its base price, so people buy it, paying more than it’s actually worth even.)

Qingu's avatar

I don’t see how the government printing money and everyone agreeing the paper has value is fundamentally different than people digging up yellow rocks from the ground and everyone agreeing the yellow rocks have value.

tedd's avatar

@Qingu You have to remember though, the rocks are shiny.

zenvelo's avatar

@CaptainHarley The Fed sets interbank interest rates. But investors set the price of Treasury bills. With the stock market down today, 10 yr Treasury Bill yields, (the interest rate) have fallen. And mortgage brokers are swamped with people to refinance these days, because interest rates are so low. Investors are not fearing inflation.

@Qingu The three greatest inflations in the last 600 years were: Spanish extraction of gold from South America, The California Gold Rush, and the Yukon Gold Rush.

Qingu's avatar

I honestly think that the 1980’s inflation scare has permanently scarred “inflation is evil!” into the collective psyches of conservative Americans who were living back then.

Inflation can obviously be a very terrible thing. Inflation in the 80’s caused a lot of problems. On the other hand, deflation can be even worse than inflation (see the Great Depression). Inflation is not an evil force that needs to be combated at all costs. And the fact of the matter is that inflation today is low by historical standards; many economists have argued that more inflation is exactly the medicine this economy needs.

CaptainHarley's avatar

@Qingu

Perhaps you have some sort of COLA in your pay. I, on the other hand do not.

Qingu's avatar

@CaptainHarley, in an inflationary economy your pay increases too.

zenvelo's avatar

By the way, Gold is down $53 per ounce today.

CaptainHarley's avatar

@Qingu

This is true, for many of those in a moderately inflationary economy, but there is a large and ever-increasing number of people on fixed incomes, and we’re slowly backing into hyperinflation where even those who get a COLA are going to be adversely affected.

Qingu's avatar

@CaptainHarley, that’s all news to me. What is this large and ever-increasing number of people on fixed incomes? (SS is tied to inflation)

And why do you think we are “slowly backing into hyperinflation”?

2010 – 1.64%
2009 – negative 0.34%
2008 – 3.85%
2007 – 2.85%
2006 – 3.24%
2005 – 3.39%
2004 – 2.68%
2003 – 2.27%
2002 – 1.59%
2001 – 2.83%
2000 – 3.38%
1999 – 2.19%
1998 – 1.55%
1997 – 2.34%
1996 – 2.93%
1995 – 2.81%
1994 – 2.61%
1993 – 2.96%
1992 – 3.03%
1991 – 4.25%
1990 – 5.39%
1989 – 4.83%
1988 – 4.08%

source

What hyperinflation?

CaptainHarley's avatar

Actually, I didn’t expect you to believe me, but I guess we’ll all see soon enough, yes?

http://inflation.us/

Qingu's avatar

@CaptainHarley, spoken like a character threatening hellfire in a Jack Chick tract.

CaptainHarley's avatar

@Qingu

I have absolutely no idea what you are talking about! Heh!

CaptainHarley's avatar

Well, all rightie then! [ rolls eyes ]

raygunak's avatar

Gold and other commodity prices vary with supply and demand + speculations. 80% of gold demand is from the jewellery industry. Significant increases in price over the last decade could be from diminishing/more expensive supplies and/or greater demand.

zenvelo's avatar

Gold is down $275/oz. from its high in Aug.; silver is down about 40% from its high earlier this week.

dappled_leaves's avatar

Probably because people read this thread.

tomcollinsrocks's avatar

only govts. and millionaires can afford to buy gold. invest in farmland cause when the fed has bought up all the mortgages then they will raise the interest rates on your mortgage. Food is the new gold.

laureth's avatar

Still waiting on that hyperinflation. Meanwhile, hope nobody got suckered into buying too much gold before it crashed.

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