Gold is a monetary metal whose price is determined by inflation, by fluctuations in the dollar and U.S. stocks, by currency-related crises, interest rate volatility and international tensions, and by increases or decreases in the prices of other commodities. The price of gold reacts to supply and demand changes and can be influenced by consumer spending and overall levels of affluence.
Gold is different from other precious metals such as platinum, palladium and silver because the demand for these precious metals arises principally from their industrial applications. Gold is produced primarily for accumulation; other commodities are produced primarily for consumption. Gold’s value does not arise from its usefulness in industrial or consumable applications. It arises from its use and worldwide acceptance as a store of value. Gold is money.
In contrast to other commodities, gold does not perish, tarnish or corrode,nor does gold have quality grades. Gold mined thousands of years ago is no different from gold mined today. Therefore, gold existing in the aboveground gold stock is interchangeable with newly mined gold. The early 1980s presented an once-in-a-lifetime opportunity to buy stocks. Today, economic and political conditions appear to offer a similar opportunity in tangible assets like gold, such as American gold coins, i.e., gold Eagles. The macroeconomic and political landscape has not looked like this since the hard asset bull markets of the 1970s. The problems plaguing your stock portfolio are jet fuel for hard assets.
The global economic and financial market climate looks increasingly precarious. Financial imbalances have never been greater following an extraordinary period of easy money. Many countries have experienced housing bubbles and massive increases in leverage, and global trade imbalances are at unprecedented levels. Rising U.S. interest rates and high oil prices now threaten to push the system to a breaking point. Like today, the 1970s were a time of huge budget deficits, loose monetary policy, soaring oil prices and the open-ended costs of war. Today, the combined costs of fighting the war in Iraq and fighting terrorism at home could match the 12 percent of GDP that the Vietnam War cost.
In the coming decade, as the dollar suffers one of the great meltdowns in monetary history, gold will reclaim its place at the center of the global financial system. Gold’s value, relative to most national currencies, will soar. “When East Central Bank buying outstrips West Central Bank selling, and it will in the not-too-distant future, the other remarkably bullish fundamentals for gold will take over and drive the gold price to levels that most people can scarcely imagine today.” (John Embry, Investor’s Digest, March 4,2005)
Source:
BlanchardOnline.com