Gold Prices in an Unstable Economy
Monday, January 25th, 2010One explanation for the increase in today’s gold price is that it is adjusting for the past 26 years of monetary inflation. The consequences of the adjustment in the gold price will be a decrease in American’s net worth and an increase in their food and energy costs.
Under a gold standard, or in a market, citizens can exchange their paper currency for gold. The gold standard gold price equals the supply of currency in circulation divided by the total supply of a country’s gold bullion. The graph below illustrates the relationship between the gold standard gold price (black line) and the actual gold price (red line) since 1950.
Influence on gold price:
The day price of gold is driven by supply and demand. Because most of the gold ever mined still exists and is potentially able to come on to the market for the rightprice, unlike most other commodities, the hoarding and disposal plays a much bigger role in affecting the price. At the end of 2006, it was estimated that all the gold ever mined totaled 158,000 tons. Given the huge quantity of stored gold, compared to the annual production, the price of gold is mainly affected by changes in sentiment, rather than changes in annual production. In times of national crisis, people fear that their assets may be seized and that the currency may become worthless. They see gold as a solid asset, which will always buy food or transportation. Thus in times of great uncertainty,particularly when war is feared, the demand for gold rises.When dollars were ully convertible into gold, both were regarded as money. However, most people preferred to carry around paper banknotes rather than the somewhat heavier and less divisible gold coins. If people feared their bank would fail, a bank run might have been the result. This is what happened in the USA during the Great Depression of the 1930s, leading President Roosevelt to impose a national emergency and to outlaw the ownership of gold by US citizens.
In 1950, the gold price was $34.72 and the gold standard gold price was $38.77. In 1971 gold price was allowed to float against the US dollar, it naturally increased. The reason for the increase was the gold price was adjusting for the 30 years of monetary inflation created by the Federal Reserve Bank.
Gold is the most popular precious metal in which people invest. It is a safe-haven agaainst any economic, political, social or currency-based crises, such as: investment market declines, currency failure, inflation, war and social unrest. Gold is unlike a bond. Gold pays no interest. But, Gold cannot become worthless like a bond can. The values of both rise and fall in free market trading.
Gold is also not a stock.Gold has no employees, no unions, pays no health insurance, has no overpaid CEO, no need to borrow money from a bank, and is recession-proof. Gold simply sits there in your vault quietly doing its job. You can see why for the average stock broker or financial advisor, Gold remains a total mystery.
Sadly for their clients, stock brokers seldom recommend investing in Gold or Silver. Despite the remarkable year-over-year gains they continue to ignore the gains being generated during the current bull market. Throughout history gold has often been used as money and, instead of quoting the gold price, all other commodities were measured in gold.
Stocks and Bonds prosper in strong economic times and bear higher risks in bad times. By contrast, Gold ignores recessions and does well when these and other traaditional investments fail.
From 1950 to October 1979 the gold price was adjusting for 30 years of monetary inflation. As the graph illustrates, the gold price equaled the gold standard gold price several times between 1979 and 1983.
In 1979, the gold price stayed within 10% of the gold standard gold price for 12 weeks, 11 of which the gold price stayed within 5% of the gold standard gold price.
In 1981 the gold price again stayed within 10% of the gold standard gold price for 31 weeks, 7 of which were with 5%, despite a decrease of 482,261.25 ounces of US owned gold since 1979.
In 1982, the gold price again stayed within 10% of the gold standard gold price for 2 weeks, including 1 week within 5%, despite a decrease of 96,452.25 ounces of US owned gold since 1981.
Finally in 1983, the gold price again stayed within 10% of the gold standard gold price for 8 weeks, including 6 weeks within 5%, despite a decrease of 643,015 ounces of US owned gold since 1982.
Over the course of 3.5 years, the gold price tracked the gold standard gold price in spite of a 30% increase in the currency and a decrease of 1,221,728.5 ounces of US owned gold. The gold price followed the gold standard gold price within 10% for 30% of the time, and within 5% for 15% of the time. This suggests that the metric used to value gold during this period was the currency divided by the ounces of US owned gold. Thus the market backed the US dollar with gold even though the US wasn’t on an official gold standard.
For the gold price to adjust for the past 26 years of monetary inflation, the price will equal $3,286.06 (dividing the currency $859.1 billion by 261,498,900.32 ounces of gold held by the US). Since the Federal Reserve Bank’s average yearly increase in the currency since 1929 is 8% (11.5% since 1971), the $3286.06 gold price will continue to increase an average of between 8% and 11.5% annually. If similar price increases were to occur today as in the 1980s, the gold price could peak as high as $7000, and could easily reach $5500.
The first fixing took place on September 12, 1919 amongst the five principal gold bullion traders and refiners of the day. The price of gold then was four pounds 18 shillings and ninepence per troy ounce. Due to government controls and war emergencies, the London Gold Fixing was suspended between 1939 and 1954. Prices of gold are fixed in United States dollars (USD), Pound sterling (GBP) and European Euros (EUR).
Historically, the Fixing took place twice daily at the City offices of N M Rothschild & Sons in St Swithin's Lane, but since May 5 2004 it takes place by telephone. In April 2004, N M Rothschild & Sons announced that it planned to withdraw from gold trading and from the London Gold Fixing. Barclays Bank took its place from 7 June 2004, and the chairmanship of the meeting, formerly held permanently by Rothschilds, now rotates annually. On January 21 1980 the Gold Fixing reached the price of $850, a figure which was not overtaken until January 3 2008. This is when a new record of $865.35 per troy ounce was set in the morning Fixing. However, with inflation, the 1980 high would be equal to a price of $2398.21 in 2007 dollars. So, the 1980 record still holds in real terms.
The consequences of an increase in the gold price are frightening. A store of value is one of the hallmarks of gold. An ounce of gold retains its purchasing power over time. Because of this, prices measured in ounces of gold remain constant in the long run. Three examples are the gold/oil ratio, the gold/CRB ratio and the Dow/gold ratio. To calculate the gold/oil ratio (currently 13.76), divide the gold price ($1138.90) by the oil price ($82.75). Other ways to say the same thing would be to say that 1 ounce of gold will buy 13.76 barrels of oil or a barrel of oil costs 1/13.76 of an ounce of gold. The graph below illustrates the gold/oil ratio since 1946.
If the return on bonds, equities and real estate is not adequately compensating for risk and inflation then the demand for gold and other alternative investments such as commodities increases. An example of this is the period of Stagflation that occurred during the 1970s and which led to an economic bubble forming in precious metals.
The price of gold is quoted in USD per troy ounce.
Since May 2004 it has been conducted by telephone. The chairman begins with a 'trying' price. The five fixing members'representatives relay the price to their dealing rooms. And these are in contact with other dealers. The market members then declare how much gold they are prepared to buy or sell at that price. The dealers, who are in contact with their clients, may change their order or add to it or cancel it at any time; the position declared by the dealers is the net position outstanding among all their clients. (If one is buying two tonnes and another is selling one tonne, then he declares himself a buyer of one tonne.) If more gold is required than is offered, then the price will be adjusted upwards (and vice versa) until equilibrium is reached. At this point the gold price is fixed. On very rare occasions the price will be fixed when there is disequilibrium, at the discretion of the chairman of the fix.
A tradition of the London Gold Fixing was that participants could raise a small Union Flag on their desk to pause proceedings. Under the telephone fixing system, participants can register a pause by saying the word "flag", and the chair ends the meeting with the phrase "There are no flags, and we're fixed".
While gold is traded in markets throughout the world, the market is essentially homogenous since the gold price is always in dollars and the gold traded is "loco London" (gold deliverable in London and meeting London trading standards). The London PM fix is normally considered the main reference price for the day and is the price most often used in contracts.
Maximum Profits Investing in Gold
In uncertain times, like we find outselves in today, precious metals will act more like a currency- preserving wealth and resisting deflation forces. There have always been unique periods in American history in which Gold and Silver suddenly act if they were the most scarce commodity on the planet!
Since May 2004 it has been conducted by telephone. The chairman begins with a'trying' price. The five fixing members' representatives relay the price to their dealing rooms. And these are in contact with other dealers. The market members then declare how much gold they are prepared to buy or sell at that price. The dealers, who are in contact with their clients, may change their order or add to it or cancel it at any time; the position declared by the dealers is the net position outstanding among all their clients. (If one is buying two tonnes and another is selling one tonne, then he declares himself a buyer of one tonne.) If more gold is required than is offered, then the price will be adjusted upwards (and vice versa) until equilibrium is reached. At this point the gold price is fixed. On very rare occasions the price will be fixed when there is disequilibrium, at the discretion of the chairman ofthe fix.
Throughout history gold has often been used as money and, instead of quoting the gold price, all other commodities were measured in gold. After World War II a gold standard was established following the 1946 Bretton Woods conference, fixing the gold priceat $35 per troy ounce.
At this point in our nation's history, investors face an uncertain future. Liberal spending this year has multiplied the budget deficits far beyond what we declared was "out-of-control Bush Republican spending."
During those decades, the investment demand for precious metals exceeds the supply, prices are bid up, and the profits can be dramatic. Let's take for example the last bull market for pecious metals in the 1970s. the price of Gold multiplied by 24 times while Silver multiplied over 30 times. With gains on that scale, Gold and Silver are hard to resist as pure profit plays.
Gold Survives & Prospers in Bad Times
In fact, in recent years, the price of Gold and Silver have more than quadrupled. Impressive indeed! Yet, those gains are far from the 24-30 times of the past leaving us with the opinion that there are still substantial gains still ahead in this bull market.
By contrast, Stocks, Bonds, and Real Estate all depend on the U.S. and World economy to be strong and growing. Right now, it's not. The U.S. is barely struggling out of a severe two year recession, the mortgage crisis still continues, the Government still owns huge chunks of the nation's banks, runs the entire mortgage industry, manages the world's largest insurer, and barely saved General Motors.
The Gold Fixing, or the London Gold Fixing or Gold Fix, is the procedure by which the price of gold is set on the London market by the five members of the London Gold Pool. It is designed to fix a price for settling contracts between members of the London bullion market, but, informally, the Gold Fixing provides a recognized rate that is used as a benchmark for pricing the majority of gold products throughout the world's markets.
The gold price fix takes place twice daily at 10.30am and 3pm, London time.
While gold is traded in markets throughout the world, the market is essentially homogenous since the gold price is always in dollars and the gold traded is "loco London" (gold deliverable in London and meeting London trading standards). The London PM fix is normally considered the main reference price for the day and is the price most often used in contracts.The price of gold is quoted in USD per troy ounce.
A tradition of the London Gold Fixing was that participants could raise a small Union Flag on their desk to pause proceedings. Under the telephone fixing system, participants can register a pause by saying the word "flag", and the chair ends the meeting with the phrase "There are no flags, and we're fixed".
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