Good News for Gold Buyers: Prices Level Off

There is good news and bad in gold prices this week.  It all depends on your point of view and position in the gold market.

As we’ve discussed here several times, the price of gold is firmly tied to the strength of the U.S. dollar and what goes on in the American economy.  When the economy is strong, the price of gold is, well, lackluster.  When the American dollar is strong, the price can actually fall.

Hence in the last year or so, we’ve seen increases in gold prices that have surprised and delighted some people as they sold unwanted gold items and pieces that perhaps were out of style or for some other reason, no longer wanted or needed.

The per ounce price of gold was expected to top $1000 by sometime this coming Fall.  But it hit that mark a couple of months ago.  It seemed that investors were hungry for the stability provided by gold as the economy seemed to be rolling on waves that threatened to take us all under.  The more the future seemed to shake, the more gold came out of safes, jewelry boxes, and anywhere else it had been hidden to re-enter the market.

The price of gold hovered there for awhile, but then it plateau’d.   Investors seemed to be thinking things over.   As we waited and held our breath wondering what effect, if any, the new U.S. President and the economic team under his administration would have on the financial futures of millions of people.  What would they decide?

The polls show that President Barack Obama enjoys a personal approval rating of 67% and job approval at 61%, but that a majority of Americans do not approve of the way he handles federal spending.  51% disapprove.  And at 48%, which is a statistical “even split” (because all polls have a margin of error at “plus or minus 3-6%”), half the country doesn’t like the way he’s handling the U.S. budget deficit.

But in spite of that, and maybe because he promised on Monday to create 600,000 new jobs over the next 100 days, the dollar is holding strong and the price of gold is wavering.  Gold futures have now slid to a 2-week low, at $945.40 per ounce.

The economy is cyclical.  Gold prices are cyclical.   But overall, investments in the market as well as gold have grown in recent years.  So… is gold going up good news for you?

Gold Up; How About a Gold Standard?

The price of gold vaults upward, surpassing predictions and hits $1000 per ounce this week.  Not surprising, given consumers and investors concerns about the stability of the American dollar.  The value of gold always flies in the opposite direction of the dollar’s value.  That is, if investors think the dollar is going up, the value of gold drops in proportion.  If investors are worried about the dollar holding value, the price of gold goes up.

And every so often, we hear some naysayer suggest that what is truly needed is a return to the “gold standard” of yesteryear.  What is a gold standard?

A gold standard is a monetary system in which the regions common media of exchange (we’ll use the dollar as our example today) is a paper note that is freely, normally convertible to pre-set, fixed quantities of gold.  The gold standard is not in use by any government currently, having been replaced by currency.  (Although there are occasional, rare private currencies backed by gold.)

Every once in awhile, when financial concerns are weighing heavily, someone suggests that “all would be right if we would just return to the gold standard.”   We suggest that is probably not a likely scenario.

Why?  Let me offer you a few of the disadvantages of a gold standard system.

* The total amount of gold ever mined is believed to be in the amount of 142,000 tonnes.  Assuming a gold price of $1000 per ounce (which is sorta handy, at the moment!) that would bring a value of about $4.5 Trillion.  There is more American currency circulating than that, currently, so using a gold standard might be a little embarrassing.

* Most mainstream economists believe that adding currency to troubled economies helps.  If we relied on the gold standard, that would be impossible.

* Monetary policy and politics would be determined by gold production.  Do you really want mining companies running world politics?

The advantage: we might all feel more confident in the government, which is good at times of economic uncertainly like what we are facing, but in fact our government needs more freedom to operate in the face of such difficulties than a gold standard would induce.

Gold standard: the name sounds good, but the prospects aren’t likely or likeable in the long-term.

Gold Prices Waver… Should You?

Remember that little hit of satisfaction when you heard that the first day of trading in the new year showed the first real gains in some months? The result? The dollar rose just slightly, crude oil prices fell nearly 5%, and gold came down just a little bit, too.

The price of crude fell because investors are concerned that our economy isn’t strengthening, and that in fact a global economic contraction would limit fuel demand even further.

Gold rose in Asia on January 1^st, but then began to lose ground. But we’re in it for the long haul, as all good investors are, right? And after 2008, there can be no doubt of the precious metal’s value in any portfolio.

The value of an investment in gold advanced 5.8 percent in 2008. The reason? Buyers were looking for asset protection as a hedge against the financial crisis that pushed many major economies into recession and drove equity markets lower.

Meantime, oil (which began 2008 at all-time high prices) fell 54 percent in the last 12 months, which is the first annual decline since 2001 and the biggest drop since futures trading started in 1983. This was largely because fuel consumption in the United States was down… a whopping 3.7 percent during the four weeks ended Dec. 26 from a year earlier, according to the Department of Energy. Oil rose 14 percent on Dec. 31 after a report showed American fuel stockpiles climbed less than expected and the conflict between Israel and Hamas raised concern that Middle East supplies may be disrupted.

“That rally on the 31st didn’t have too much behind it so we’re seeing crude come back to a level more reflective of the fundamentals,” said Toby Hassall, an analyst with Commodity Warrants Australia in Sydne, AU. “We still don’t have a clear picture of when a global recovery is going to take place.”

Most economists don’t predict recovery to be a quick or a smooth process, but a long and painful ride that will take months if not years to get through. Investment dollars may never return in some areas, although crude oil may rise next week as the Organization of the Petroleum Exporting Countries makes record production cuts to counter this, the deepest economic slump since World War II.

What about gold prices? Gold seems to follow fluctuations in energy costs. If energy continues to drop, the cost of transportation, manufacturing and ultimately goods may fall, giving the American economy a little room to improve and carrying the dollar upward, but sending the price of gold downward. The two tend to move in opposite direction, reflecting gold’s value as a hedge against inflation.

But again, gains in all types of investing are seen as we stay in the market over a long period of time. If the economy strengthens more quickly than expected, gold’s value will hold, but it may become more precious for its other value: the art of the jeweler in the eye of the beholder.

Gold Prices Going Up!

For the first time in some weeks, the prices of gold have started to rise.  It happened on Friday, after a week of miserable financial news and word that deflation was on the way as fuel prices fall, food and retail prices fall, and inflation backs off.  But gold comes to the rescue of investors, edging forward slightly as the dollar weakens.

This is interesting news after months of dismal prospects for miners and mining companies.

I spoke with a foreman who works for a mining company while I was at a family event this weekend.  He gave me the “sad news that 1000 people were laid off by our company on Friday.  We’re just not doing the work because we don’t have the customers right now.”  His company mines everything from sand to salt with minerals and precious metals in between.  So this latest news is good for those companies; their workers and those workers’ families.

Shares of the world’s largest gold mining companies jumped on higher gold prices Friday as investors shifted into precious metals and demand for the product continued to build.

Barrick Gold Corporation, the world’s largest gold producer, along with Newmont Mining Corp., the second largest, and other mining firms posted double-digit gains by late afternoon. The price of gold for future delivery jumped above $800 an ounce – up $52.90 to $801.60 by Friday afternoon on the New York Mercantile Exchange.

The renewed interest comes as investors seek safer investments amid volatility on Wall Street. “There’s been a tremendous amount of pressure on gold in recent weeks because as there’s been a lot of liquidity selling,” Barnard Jacobs Mellet analyst Patrick Chidley said in a telephone interview.

“It’s this battle between sellers trying to find liquidity and raise cash and the long-term fundamentals which are for higher gold prices as a result of a weaker dollar,” he said.

Now here’s the key part for us here at ApplesofGold.com: although we hope for a reasonably lengthy delay in rising jewelry prices, the lower gold prices have boosted demand among jewelry manufacturers and investors, according to Chidley.  This means that prices, which have been sitting idly while the economy appeared to weaken, may be going up.

Holiday prices are expected to remain low, and some say “big sales” and “huge markdown” will be the bywords this holiday season.  But after that, with gold prices going up, expect jewelry prices may start to launch upwards, too. So let the buyer beware: now is the time to shop.