Gold Price in an Unstable Economy by anamaulida

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        One 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 &amp; Sons in St Swithin's Lane, but
since May 5 2004 it takes place by telephone. In April 2004, N M
Rothschild &amp; 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. Â Maximum Profits
Investing in GoldIn 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 &amp;
Prospers in Bad TimesIn 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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