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What’s Up With The Price Of Gold?

Gold has been breaking records of late, zooming upward to reach new nominal highs. On August 2, 2011, one ounce of gold reached the previously unthinkable price of almost $1,650. (1) Based on fundamentals, gold prices will likely increase further within the coming months. Another event that took place on August 2nd spells out the entire reason why gold prices will go up even more: Congress voted to raise the debt ceiling by $2.5 trillion. (2) Added to the outstanding national debt, this means Congress voted to increase it to $16.7 trillion. The national debt will be over 100 percent of U.S. Gross Domestic Product (GDP) at that level.
The record nominal high for gold of almost $1,650 per ounce occurred on the same day Congress voted to raise the debt ceiling, a surprise to no one. Investors are fearing further devaluation of the dollar as the Federal Reserve may engage in another round of quantitative easing or "QE3." On July 29, 2011, the GDP report for the second quarter of 2011 was released by the Bureau of Economic Analysis (BEA). The report revealed that GDP grew at a mere 1.3 percent over the first quarter. Incredibly, the first quarter’s GDP growth rate was revised downward, from 1.8 percent to a stunning 0.4 percent. (3)

When Federal Reserve Chairman Ben Bernanke hinted at QE2 in August 2010, the stock markets had been falling throughout the first half of the year. Economic growth was sub-par, and Chairman Bernanke felt the pressure to ease the economic pain by printing money. (4) Formally announced in November, QE2 sent bond yields, stocks and gold prices soaring. (5) While bond yields eventually came back down, as did stocks, gold has continued to march upward. A similar set of conditions that led to QE2 are now present, giving rise to speculation that the announcement of QE3 is imminent when the Federal Open Market Committee meets on August 9.

Even if QE3 is not announced, gold prices will continue to go up. The popular finance blog Zero Hedge featured a chart showing the close correlation between increases in the debt ceiling and the price of gold. The blog has now created a second chart showing the projected gold price up to the limit of the new ceiling increase: $1,950 or higher. (6) Reputable commentators from around the world have warned of the inflationary dangers resulting from increasing the debt ceiling. Investors are afraid of further devaluation of the dollar, and some are even warning of an eventual hyperinflationary collapse, putting the dollar on the list of failed fiat currencies. (7)

The best way to protect oneself from inflation or hyperinflation is to buy precious metals or other commodities. Gold and silver are preferred to oil, foodstuffs and industrial metals because they are easier to acquire. Several bullion dealerships have been making money lately buying and selling gold to investors and ordinary citizens concerned about the current economic climate. Gold prices reflect inflation expectations as well as traditional benefits like diversification and gold’s safe-haven status.

Related : How To Invest In Gold?

Gold as a safe-haven far outstrips the value of other "safe havens" like cash or Treasury bonds. Both would rapidly lose their value in a high inflationary or hyperinflationary environment. Owning physical gold bullion in addition to gold-related investments is the best way to protect a portfolio from currency debasement.

References:  1,2,3,4,5,6,7

Jeff Johnson is a retired money manager, as well as a part time car insurance agent.  If you’d like to reduce your monthly expenses consider comparison shopping with some online auto insurance quotes.
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