Friday, December 9, 2011

Gold Unleashed!

I have received a lot of email regarding my November 27th post on Real Money. Specifically, the correspondence was divided into two camps. One was arguing that the price of gold is strongly inflated due to the falling value of the United States Dollar. The other was vehemently professing that the soaring demand from countries like China and India played a major factor.

Both factions are correct, to an extent. The nature of gold, as stated previously,  is that it has intrinsic value that no treasury in the world can devalue. As such, it is highly desirable at the moment by countries and individuals who don't value paper currency on the same level.

With the treasury printing presses in the US and Europe set ready to greatly devalue the dollar and the euro, the one asset governments cannot devalue is thrust into limelight. Relative of these currencies, gold will retain its value.

However without buying or selling of the gold itself, its price would remain the same regardless of where the dollar goes. It is the actual volume of gold purchases that drives up the price (demand).

So to answer my readers - you are both right. The falling value of the dollar is providing the motivation for countries and individuals holding the dollar to convert it into another asset that is more stable - gold. These purchases drive the demand and, subsequently, the price up.

The recent Federal Reserve intention to provide more liquidity only means that our government is ready to do more of the same. They will continue printing tonnes of money, hoping to devalue their debt and your savings. This should provide sufficient and significant additiinal motivation for countries and individuals holding dollars to convert them to gold.

Caveat: The worsening situation in Europe may provide a temporary flight toward the US Dollar as a perceived safety asset. During this time you may see some institutions and individuals sell gold for dollars. As a result, the price of gold and precious metals may fall to an extent. However, in my mind the safety in the US Dollar is a false perception and this boom will not last long. Therefore, I will use this period of Dollar's strength (and precious metals' fall in price) to purchase gold and silver.

There are many ways in which you may own gold. Bullion, coins, stocks, ETFs - it is up to you. Just remember that there are no guarantees in life and weigh risk/reward carefully.

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