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Gold Prices Waver… Should You?

gold-blogRemember 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 1st, 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.

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