“Analysis confirms gold’s properties as a hedge against extreme events; properties that may be especially valuable given the considerable uncertainties still facing the world economy,” according to an Oxford Economics research study, commissioned by and recently published on the World Gold Council website.
Investors saw gold prices go up from $35 per ounce in 1950 to $280 by 2000, with lots of ups and downs in between, with the highest being $613 in 1980. By 2001, it hit the lowest point at $272 and then edged up to $1,270 by 2010.
As of Wednesday, the price of gold futures have eclipsed $1,659 per ounce, on the Comex, part of the New York Mercantile Exchange.
The Oxford study argues that historical analysis implies that gold prices are held at a specific value over time. But alas, short-term factors could change gold’s long-term equilibrium, and it could take quite some time for it to return to its former state.
“These factors include financial stress, political turmoil, real interest rates, inflation, central bank activity and the US dollar exchange rate,” according to the Oxford research.
Gold as a Hedge Against Market Volatility
While gold and silver prices have been moving upward, the commodity markets fell during the first six months of 2011. For example, the commodity price index for food and beverages, industrial inputs, metals, and even for crude oil has fallen on the month-to-month index.
However, the year-to-date changes were quite volatile and showed vast increases for some products (mostly in the energy sector, such as the price index for crude oil and gasoline and surprisingly the index for oranges, coffee, and sorghum), while with other commodities, the price index decreased (fish, sugar, palm oil, rubber, and uranium).
To jog the mind, the commodity market is a place where raw or primary products (products that have not yet been altered to make a product, that is, products used in the production of goods) are bought, sold, and traded. Investments in commodities can be made through a number of investment vehicles, with the most prominent being future contracts, where a firm locks into an assumed future price to avoid the risk of higher prices when buying products.
“While commodities exhibited heightened levels of volatility and sharp falls in price during the month of May, gold’s volatility was modest and its price remained stable,” said Juan Carlos Artigas, investment research manager at the World Gold Council, in a recent press release.
Gold Volatility Held at Bay
“Soaring commodity prices [especially in the energy sector], which trended up between June 2010 and April 2011, and higher global inflation coupled with continued concerns over the economic outlook in western economies kept gold well bid,” according to the World Gold Council’s Gold Investment Digest, published in July.
Although commodity prices showed a steep decline about three months ago, the price of gold was not affected by the global economic downturn and kept up its steady upward movement.
Gold kept edging up during the latest economic upheaval, mostly because of its value to investors. In 2000, the New York market price per ounce of gold was $280.10. By 2005, the price had moved up to $446 and by 2010 to $1,270.
During the second quarter of 2011, the average gold price had increased by close to 9 percent when compared to the first quarter and hovered around $1,506.13 per ounce. Even the prospect of a Greek default didn’t affect the price of gold, nor did the unease about Europe’s sovereign debt.
The interplay of various global economic and financial factors has kept the price of gold on an even keel. These factors include inflationary aspects, especially pronounced in China and India, as well as the stress of a volatile pricing trend in developed nations, such as the United States and Western Europe, along with the problem of ever increasing goods and services prices.
Other factors, as perceived by the authors of the Gold Investment Digest, include the Western world’s worry about the possibility of lingering inflation, deflation, or stagflation, given the continued weak economic growth.
Inflation occurs when the prices of goods and services continue to rise, reducing the purchasing power of consumers. Deflation occurs when prices fall, resulting in shrinkage of profits, increased layoffs, shutting down of factories or outsourcing to foreign countries, and bankruptcy. Stagnation occurs during periods of slow economic growth, continued high unemployment, spiraling prices (such as gasoline and food price increases), or lingering inflation.
Next…Rising government interest in gold
Friends Read Free
Copy
Facebook
Tweet
