Gold reaches new historical price highs (Up approximately 13% this year 5). The commodity has outperformed stocks and bonds so far in 2010. 5). The commodity has outperformed stocks and bonds so far in 2010. 7 Are gold investors concerned inflation is just around the corner or an ominous concern another debt crisis or political unrest presumably will unfold once again around the globe? The potential risk and rewards gold investor’s views are analyzed.
In the United States no current signs of inflation for gold investors to hedge against. The U.S. Dollar is stronger than currencies around world, underlying anti-inflation sentiment. A strong U.S. Dollar makes imported goods less expensive, passing the savings by lowering prices by many retailers especially Walmart to consumers. Crude oil prices have fallen giving consumers a break at the gas pump besides less gas taxes to pay. Majority of retailers and manufactures are hard pressed to raise prices because of competition and U.S. economy still struggling to emerge out totally from a recession. However, future Federal tax increases, potential higher medical expenses and increasing Federal budget deficit or spending, trigger investors to purchase gold as a hedge against potential inflationary concerns.
Gold prices recent climb to new highs maybe attributed by investors, worried about another looming debt crisis and political unrest (Greece, Jamaica, and Thailand 4 ) unfolding somewhere around the globe. Sometimes history tends to repeat itself especially in the financial and political arena. During the past many weeks and months: Standard & Poor’s 500 stocks has steadily fallen, (Dow Jones below 10,000), crude oil prices have dropped, EURO Dollar has continued to sink to new lows (recently a five year low), commodity prices such a copper plunge to the lowest level in eight months (1) , “Prices for framing lumber have tumbled 21% from their peak only five weeks ago, according to figures from the National Association of Home Builders (2)”, and steel prices likely to fall as China’s biggest publicly traded steelmaker, slash prices for the first time in eight months (China Government curbs spending may trim demand from automakers and builders) (3). A debt crisis emerge when a financial institution, hedge fund or Governments make bad investments in commodities, currencies, derivatives, and / or stock indexes contrary to their object investment direction, consequentially often the outcome is a magnitude of epic financial losses felt negatively among most financial world markets. Gold investors buy the commodity anticipating another debt crisis emerging again. “Concerns that large industrial nations with huge debt burdens will attempt to inflate away their debts thereby devaluing currencies is also leading to investment demand for the finite currency that is gold.” 6 Another debt crisis maybe looming again for OPEC nations including Kuwait and non – OPEC nations, concerns financing their debt obligations, as crude prices continue to fall.
Gold investors often buy the commodity as a safe heaven, anticipating a political crisis and military intervention which may unfold, such as in Korea, Middle East, Russia, and other locations on the globe. 4
“Greek citizens are buying gold at a 40% premium, which gives you an idea of what happens when public confidence evaporates.” 4 The scale of Greece debt concerns severe enough for gold investors hedge against a possible default on its government debt obligations, despite a financial rescue package. If Greece defaults, other debt countries such as Italy, Spain and Portugal may follow in the same direction. 8
In countries where the EURO dollar is the primary currency, devaluation of the currency during the past months, cost consumers more to purchase imported goods and services. Investors in EURO countries realize purchasing gold is a hedge against spiraling price increases or inflation. Unfortunately foreign governments may not be able to control consumer price increases for imports, as the EURO continues to plunge, least in the short term.
1.) Copper falls to lowest level in 8 months – http://news.yahoo.com/s/ap/20100607/ap_on_bi_ge/us_commodities_review_2
2.) Beward of falling prices – http://money.cnn.com/2010/06/08/news/economy/lumber_deflation_double_dip/index.htm?section=money_latest
3,) Baoshan Steel Cut Prices for the First Time in Eight Months – http://www.bloomberg.com/apps/news?sid=aSu_4dBG29UY&pid=20601087
4.) Growing Political Unrest Should Help Gold Prices – http://investorcentric.blogs.nuwireinvestor.com/2010/06/growing-political-unrest-should-help.html
5.) Nervous investors look to gold as safe haven – http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2010/06/07/BUK01DRBRC.DTL
6.) Gold Consolidates Near Record Nominal Highs in Nearly All Currencies – http://news.goldseek.com/GoldSeek/1276088400.php
7.) Gold Rises to Record on Demand for Haven From European Crisis – http://www.businessweek.com/news/2010-06-08/gold-rises-to-record-on-demand-for-haven-from-european-crisis.html
8.) Gold hits record high as investors seek solace from Greece’s debt crisis -http://www.nydailynews.com/money/2010/05/12/2010-05-12_gold_hits_record_high_as_investors_seek_solace_from_greeces_debt_crisis.html