Gold Hits New Highs: Reasons and Implications

2007 was probably one of the greatest years for the commodity market, with exuberance across the globe. Gold has been one of the beneficiaries that has witnessed one of the most phenomenal and unprecedented increases in prices. Prices have been up by almost 80% in the last 2 years and approximately 35% during the year 2007.

Gold has generally been a counter-cyclical commodity. This is the reason why a general downturn in the economy is always accompanied by a rise in Gold prices. This time around, the increase was perpetrated by a rise in oil prices, and the weakening dollar. Liquidity also declined later in the year, decreasing investment demand and thereby pushing up prices further. Declining tensions amidst Iran and Syria also fueled the rally.

Other than serving as a perfect hedge against inflation, Gold has been a relatively risk free asset ensuring stable and consistent returns for its investors. Thus, in the wake of instable markets as well, the rise in demand for Gold as an investment tool has been on the rise.

Conjointly, there has been an upsurge of Jewelery demand from the markets of India, China and the Middle East. At the same time, an exodus of Exchange traded Funds have facilitated access to investment in Gold. These are primarily the demand side factors producing a pull effect on prices.

On the supply side, the push factor has been the unavailability of Gold to match the rise in Demand. The steadfast uptrend in the cost of gold mining and extraction, coupled with a shrinking global output of Gold mines, has exerted an upward pressure in the prices of Gold.

The previous high in Gold prices was achieved way back in 1980 when the Soviet Union invaded Afghanistan and the Iranian Revolution took place.

The price reached a high of 891.70 as reported by Bloomberg today. According to analyst's gold is expected to even trade higher with some predicting levels of 1000 for 2008. The short-medium term bet is that it will trade a lot higher and could be 900 by mid year and 1000 by end of the year!

Whatever be the year end figure, the resonating view is primarily the same. With the current economic and political state of affairs, this unprecedented Bull Run in the evergreen precious metal is unlikely to let up.

Comments

[Philly Jim]

How about 10k an ounce gold to hedge against the apocalypse! lol

I can't wait to see what happens to OUR polar caps, ozone layer and biosphere when India starts churning out $2,500.00 cars and traitor Rick Wagoner puts every Chinese and Russian into a new Buick by 2010.

Yeah, I see gold going to 10k but what use will it be in that climate?

[Georealist]

This wasn't a post about polar caps, ozone or any other political, fear mongering agendas. If jim blah blah is so concerned about these things why is he regaling us with his in sight on an investment website? How about the dude man up and join Greenpeace and raise some hell..and stop the whining garbage.
Buy some gold..it's going no where but up and Indians..after selling lots of cheap cars to people who can't afford better..will buy some of the stuff.