When All Else Fails Turn To Gold

Dear Reader,

As You may already know, I have been asked to write a financial blog over the next 12 weeks in which I will not only provide You with a detailed summary of a financial article every week but I will also express my opinions on the matter. I have decided to concentrate my blog on the financial markets post 2007 financial crisis focusing on the real estate market (an extremely interesting market since it is now starting to recover again after it was hit tremendously in the previous years) and natural resources (which have always been of particular importance and have been talked about mostly because they are exhaustible and we therefore worry about creating substitutes for the future). 

http://cdn.benzinga.com/files/gold_12.jpg

In my first blog I will be writing about an article I read this week on The Independent which was entitled “Gold hits another new high”.  This article talks about the rising price of gold and how on Friday it rose to an intraday record of $1,284.40 per ounce (which is about 0.0283495231 kilograms). The article also points out that gold is viewed as a “safe haven” during tough times and that it is considered to be a low risk commodity that enjoys peak prices during times of volatility. Gary Mead, a senior commodity analyst with VM Group also says that this rise in the price of gold is to a certain extent due to a “complete lack of confidence in the governments of the world being able to sort out their financial mess”.

Now it is first of all important to explain how gold prices are set and why people decide to invest in and buy gold. Gold is one of the oldest forms of investment available, until August 15^th 1971 the value of gold was based on the gold standard, which enabled people to convert paper money into fixed quantities of gold whenever they wished. Now a day though, the price is set by the “Gold Fixing” a telephone meeting, which occurs twice a day (at 10:30 GMT and at 15:00 GMT). Gold is usually bought in times of national crisis since people start to fear that their paper currency may no longer hold value.

The price of gold has now been rising for the ninth consecutive year and it is time we ask ourselves why this is happening. I believe that there are 3 main reasons why people have recently been relying so much on gold, these reasons being: the unreliable economy, the fear of losing money and the inflation.

Many people see our economies (especially the European economies and the American one) as an extremely unreliable and do not agree with the choices they have made over the past 3 years. It is incredible how the biggest and most important banks required a bailout of nearly $1 trillion and how companies such as Fannie Mae and Freddie Mac and General Motors are now under U.S conservatorship. The U.S economy is in a multi-trillion-dollar deficit hole and they are not alone, how many times this year have we heard about economies in deficit that needed help, the latest European example being Greece. Citizens simply do not trust their economies anymore and they are angry that they are “asked” to solve these economical debts by paying higher taxes.

The second reason why I believe people are turning to gold is the general fear, in particular though the fear of losing money (or even more money if they already have lost some). Investors now a day prefer to stay away from anything risky and have even started to shift assets from the euro and other weakening currencies into gold. People do not trust paper assets as much anymore and prefer sticking to a material resource such as gold.

The third reason why I believe gold is becoming more and more popular is inflation. Yes, we are not experiencing inflation at this moment in time but it is obvious that all these stimulus packages and bailouts mean that there is much more money in the system. The Federal Reserve, the European central banks, the Swiss National bank, and the bank of England have drastically increased their balance sheets already.

Getting to the end of this blog, we should ask ourselves some questions. The first one being is gold really as reliable as we are made to think it is? And are we ever going to really come out of this financial crisis? I feel as though we are now in a vicious circle were problems are hidden rather then confronted, should we have started everything over instead of saving all the “too big to fail” investment banks? 

Have a good week,

The Financialista




The Times:
http://europeadmin.citywebwatch.com/Admin20C/PDFAggregation/ViewFile.aspx?file_id=3686


The Financial Times:
Farchy, Jack (2010) "Gold price marches to fresh record" Date Viewed: 19th September, 2010. Available online at:
http://www.ft.com/cms/s/0/7173445a-c67a-11df-8a9f-00144feab49a.html?ftcamp=rss


Images:
CDN benzinga (2010) Date Viewed: 19th September, 2010. Available online at:
http://cdn.benzinga.com/files/gold_12.jpg