Sinking Economy and Bouncing Gold

Since early times, economy and rare gold coins have shared an inverse relation. When the economy goes down, the paper currency and stocks follow the suit. During these times, gold becomes an attractive proposition for investments and hedging. When gold surges, the speculators also buy in, further fueling the valuations. It is interesting to note that over the last decade, gold has advanced by almost 400 percent! Amidst the discouraging world economic scenario and fears of a double-dip, gold touched an all time high of $1,254 per troy ounce on June 8, 2010.

Jason Toussaint from the World Gold Council believes, “Gold has a 5,000-year track record of preserving wealth. During times of market crisis there's a flight to safety, and gold makes a strong candidate for a long-term strategic asset.” Even after the dissolution of the Gold Standard worldwide, the demand for gold never receded. Economic prudence remains the most important driver of its prices. Professor Fred Foldvary, from the Economics Department of Santa Clara University insists that at any given point of time, the metal has a fixed international price and is used as virtual money. Although, technically gold is not a part of any barter trade, its set international value imparts it the character of money.

An ardent follower of gold, Foldvary sums up the relation between the Government policies, market forces, and the gold prices, over the last three decades. The oil (1973) and energy (1979) crises left a condition of stagflation in the US. The value erosion of the paper currency made gold and real estate investments, viable risk coverage strategies. The metal touched $850 per troy ounce. To contain the exorbitant price levels, the Federal Reserve sucked liquidity out of the market. This led to a severe recession between July 1981 and November 1982. Gold prices crashed when people had to sell off their gold holdings, held in the form of investment and even jewelry. The prices tumbled to the new lows of $250 per ounce. Since then, in the times of economic instability, gold has surged to record levels.

The analysts from almost all the quarters are betting on a further jump in gold prices in the coming time. UBS predicts that gold will be in the proximity of $1,500 per ounce by the year-end. US based financial planner, Beck believes that the growth story will continue in the time to come. “When we eventually get inflation, maybe in 2012, gold will continue to climb all the way into 2017. And then I'd look to sell,” she says.