The weakness of the US dollar has sparked caution in the global economy, making gold a hotter commodity. More investments are being made on the precious medal because it is considered a safe investment in washy economic times.
In the past ten years, gold prices have gone up 500% from a record low of $258 an ounce in 2000.
Jewelry buyers, mainly in India and China, are expected to keep the price up because they have such a strong demand for the medal.
According to GoldAlert, shares in the SPDR Gold Trust, or GLD, have risen to $125.45 per share, which is a record high.
Following the jump in gold prices, the Dow Jones Industrial Average jumped 145.77 points to 10,753.62. Although this jump accompanied a report from the National Bureau of Economic Research claiming the recession ended in June of 2009, the US Dollar Index (DXY) continues to slide.
At a Federal Open Market Committee meeting in August, Ben Bernanke announced the federal governments plan to convert $200 billion of debt and $1.25 trillion of mortgage-back securities into US Treasuries, which in turn will fuel the rise in gold prices.
In the past years, retail demand for gold products in Europe has soared, according to BBC News.
In 2008, the demand for gold coins and bars was 243 tons, rising to 293 tons in 2009. However, early on in the first decade of the new millennium, European gold demand failed to rise above single figures.
What About The United States Economy?
As the dollar continues to decline (it’s fallen 39% since 2002, according to Business Week) the global economy will grow in uncertainty, but what does that mean for the United States economy?
James Paulsen, chief investment officer of Wells Capital Management, stated that a cheaper dollar is good news for blue collar workers. Although the recession has hurt blue collar workers in the past, losing approximately 290,000 jobs, companies like Boeing will be able to broaden their market shares worldwide, battling competition from imports, thus creating more jobs in the blue collar sector.
However, bankers will be hit hard by the worsening dollar says Business Week. As wealthy foreign investors see the dollar’s value go down, they are less willing to invest in US banks. As a result, US banks are beginning to throw their funds elsewhere, shifting them into the European financial system.
Do The Benefits Outweigh The Risks?
James Paulsen believes that if the dollar hadn’t fallen, our economy would be in worse shape than it is now. The dwindling dollar effectively shrunk the trade deficit, causing the economy to grow 1% overall. This little boost may very well have saved the United States economy from further troubles.
The rise in gold prices are irrevocably linked to the turbid global economy, or more specifically, the United States financial system. As long as our dollar continues to deplete its value, gold prices will continue to rise.
Gold Jewelry Demand Continues And Investors Pile In – BBC News
Gold Price Touches $1300 Record High – BBC News
Gold Price Hits All-Time High, Dollar Slides – GoldAlert
The U.S. Dollar: Still Going Down – Business Week