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Economics of Gold

Economics of Gold

What’s driving gold to record highs?

If gold was your rich uncle Charles, he'd be sitting in the back of a limousine, sipping a glass of champagne while his chauffeur drives him up the slope of a mountain. In other words: gold prices are climbing, fast and steep. Most of us are aware of gold's recent ascent, but the real question is: who's in the driver's seat?

The answer is based on one of mankind's most primal emotions: fear.

In the last 10 years, countries have been printing vast amounts of money beyond conventional monetary policy in order to help offset the effects of economic recessions. Although, this increase in money supply may be necessary for economic stimulus, it also correlates with higher rates of inflation; inflation decreases the purchasing power of money. A sense of fear and uncertainty surrounding currencies such as the US dollar begins to arise and what happens next is a phenomenon called "flight to safety"; citizens begin looking at alternatives to currency if the US dollar fails.

The alternative currency is, you guessed it, gold!

Due to its intrinsic value, gold has a long history of "backing up" other currencies (the gold-standard). When the going gets tough, gold gets going! And so we are seeing a modern-day, fear-induced gold rush; people are lining-up to purchase gold bars and wafers as a back-up plan. This increase in demand for the commodity has now pushed the price of gold to over $1750 per ounce, near record high. So, just how tall is the mountain that gold is climbing? Unfortunately, the answer is nearly impossible to predict. Gold is a very speculative investment and its price is highly volatile. If the fears surrounding conventional currency begin to subside we will see the price of gold take a sharp decrease.

What does this mean for us?

With the price of gold at a near historic high and the uncertainty surrounding its future, it is becoming very attractive for people to cash in the gold they have now to avoid future losses. While not everyone owns pure gold as an investment, most people have old, unworn gold jewellery laying around at the bottom of their drawer. The good news is that, when the market value of gold increases, so does the value of your old gold jewellery. And with gold prices hitting near record highs, your gold has never been worth more.