Why the Rush to Get In on the New Gold Rush?

Good as gold (relatively speaking)

Monetary values fluctuate for many reasons. The primary reason for the fluctuation of the dollar is that the value is established through relative means. In other words, in the world market the dollar is valued in comparison to the monetary units of other world economies.  As each of these economies rise and fall, so does the relative value of the dollar on the world market.

The World Bank sets the values based on very complex algorithmic computations. The bottom line is that the value of the dollar is not based on any one solid valuable object. This has been the case ever since the United States went off the gold standard and onto the Federal Reserve Note Standard. The American dollar became a promise from the government as opposed to a certificate representing a certain amount of gold in Fort Knox.

When the dollar falls

When the value of the dollar is weak compared to other world currencies, cash becomes a depreciating asset.  Investors do not like depreciation in any capacity unless they are writing something off on their taxes. When the dollar depreciates, investors tend to put their money into something less conceptual and more concrete. Gold has always been the most stable precious metal historically and the most valuable.  Gold is valued all over the world and is not as subject to the fluctuations of a global economy as national currencies are.  So, when the dollar is weak investors turn to gold.

The new rush to gold

A unique factor in the current economy is the depth and duration of the recession.  The dollar has fallen so far and for so long that more than the usual number of investors are exchanging cash for gold.  This increased buying volume has driven the price of gold up to almost unheard-of heights.  Projections put gold at more than $1200 an ounce by year’s end, up 26% for the year.  Rarely if ever will you find a return like that under such tough economic conditions.  The longer the recession lasts or the slower the recovery from it, the higher gold prices will soar.

Precious few will benefit

A rise in gold prices might appear to help certain areas of the economy.  For example, people might think that a good return on gold would boost commerce in general.   Quite the opposite is true, however.  First, the investors who can afford to buy gold are few. If they’re buying gold, they aren’t buying anything else. Secondly, for jewelers a rise in gold prices actually hurts them in a down economy. The average consumer doesn’t have any more money to spend on a luxury item than they did before, but the cost of production has increased dramatically for the jewelry maker.  Some analysts predict that gold will rise so high that jewelers will be forced to switch to silver as the standard precious metal for making jewelry.

The golden hour

For those wanting to get in on the gold rush: a word of caution.  The last time gold soared was around 1980.  It crashed about a year later and took 28 years to get back up to near the same level of value.  The average investor should not be in a rush to get in on the new gold rush.

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