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Reasons Why Gold Will Rise

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Of all the precious metals, gold is the most popular as an investment.[1] Investors generally buy gold as a hedge or harbor against economic, political, or social fiat currency crises (including investment market declines, burgeoning national debt, currency failure, inflation, war and social unrest). The gold market is subject to speculation as are other markets, especially through the use of futures contracts and derivatives. The history of the gold standard, the role of gold reserves in central banking, gold's low correlation with other commodity prices, and its pricing in relation to fiat currencies during the current global financial crisis, suggest that gold behaves more like a currency than a commodity.[2][3]

Today, like most commodities, the price of gold is driven by supply and demand as well as speculation. However unlike most other commodities, saving and disposal plays a larger role in affecting its price than its consumption. Most of the gold ever mined still exists in accessible form, such as bullion and mass-produced jewelry, with little value over its fine weight — and is thus potentially able to come back onto the gold market for the right price.[11][12] At the end of 2006, it was estimated that all the gold ever mined totalled 158,000 tonnes (156,000 long tons; 174,000 short tons).[13] This can be represented by a cube with an edge length of 20.2 metres (66 ft).
Given the huge quantity of gold stored above-ground compared to the annual production, the price of gold is mainly affected by changes in sentiment (demand), rather than changes in annual production (supply).[14] According to the World Gold Council, annual mine production of gold over the last few years has been close to 2,500 tonnes.[15] About 2,000 tonnes goes into jewellery or industrial/dental production, and around 500 tonnes goes to retail investors and exchange traded gold funds.[15]

Gold is one of the oldest forms of investments available, but many people do not understand how the price of gold is set. Whether you are interested in diversifying your assets or worried about the consequences of an economic depression, it is important to understand the factors that influence rising gold prices.
At one time, the value of gold was based on the gold standard. Under this monetary system, citizens were able to convert paper money into fixed quantities of gold whenever they wished. However, the gold standard ended on 15 August 1971 when governments were given the freedom to print as much paper money as they saw fit.
Today, the price of gold is set by the Gold Fixing. Also known as the Gold Fix or London GoldFixing, this is a meeting of five members of the London Gold Pool that is conducted twice a day by telephone, at 10:30 GMT and 15:00 GMT. Officially, the purpose of the Gold Fixing is to settle contracts between members of the London bullion market. However, the Gold Fixing is widely recognized as the benchmark used to price gold and gold products throughout the world.
People can invest in gold directly through bullion ownership or opt for indirect investments such as certificates, derivatives, or shares. As with most other forms of investments, the priceof gold is greatly influenced by supply and demand. Unfortunately, gold is rather unique in that most of the gold ever mined is still in existence and could thus enter the market at any time. This leaves the price of gold open to influences from hoarding and disposal practices.
During times of national crisis, such as a war or a serious natural disaster, the price of goldtends to greatly increase. People start to fear that their paper currency may no longer hold value, but they see gold as a stable asset that can always be used to purchase food and other necessities.
Another common factor influencing rising gold prices is the success of the real estate market. When there are low or negative returns on real estate, the demand for gold and other commodities typically is expected to increase.
Bank failures, although somewhat uncommon today, can also contribute to an increase in theprice of gold. The best example of this occurred during the Great Depression, when rising goldprices due to bank failures led President Roosevelt to ban the holding of gold by private citizens.

1. Economy
How many times have you heard the phrase “not since the Great Depression” applied to today's economic climate? It's fitting, given that the United States has endured the deepest and longest economic correction since the 1930s. The U.S. manufacturing base has been shipped overseas. The few jobs being created are in the service industry or government sector. The official unemployment rate hovers near 10%, and 1 out of every 8 Americans is on food stamps. Volatility plagues the stock market. The 2008 economic implosion gutted real-estate values, sent foreclosures skyrocketing and required a nearly $1 trillion bailout of the “too big to fail” investment banks. Fannie Mae and Freddie Mac are under U.S. conservatorship, along with General Motors. The U.S. government has fallen into a mammoth gulch of multi-trillion-dollar deficits and unfunded liabilities, and it's not going to emerge from that hole without higher taxes and painful austerity measures. Meanwhile, debt time bombs already are exploding in some of our biggest cities and states.
2. Fear
As the market does its daily job of balancing fear and greed, it becomes increasingly apparent that fear predominates. Investors are abandoning anything with the slightest hint of risk. The sovereign-debt crisis that started with Iceland and Greece is threatening to spread across the globe. Fearful investors are shifting assets from the euro and other weakening currencies into gold. Even the recently sagging U.S. dollar has benefited, but given that the debt-laden federal government is about as bad off as Greece in every important economic metric, the world's reserve currency is living on borrowed time. The stock market rebounded from its 2008-09 depths, but some analysts say it's overbought and due for painful correction. And the Dow's 1,000-point plunge on May 6, 2010, showed investors just how breathtakingly vulnerable paper assets can be. Meanwhile, the winds of war continue to howl across the Middle East, Asia and elsewhere, exacting huge costs in American blood and treasure.
3. Demand
The Federal Reserve has kept U.S. interest rates at virtually zero, with no sign of a hike on the horizon, thereby lowering the opportunity cost of buying gold. And investors have responded with astonishing eagerness, even forcing the U.S. Mint to ration popular bullion products in order to meet overwhelming demand. After all, gold's value does not arise from its industrial applications but from its worldwide acceptance as a safe store of value. As the public loses faith in debased paper currencies, the clamor for gold will increase exponentially. Also fueling demand are the world's central banks, which in a major trend reversal have now become net buyers of gold instead of sellers. Expect central banks in China, India and Russia to fuel demand for gold. Beijing not only is stocking up on gold as it divests itself of its dollar holdings but also is encouraging its increasingly affluent billions of citizens to buy gold. And the creation of “paper gold” – the metal-based exchange-traded funds, which Blanchard and Company does not endorse because of their inherent risks – has increased investment demand and buttressed the price of gold.
4. Reflation
Gold benefits from the cure for deflation, rather than from deflation itself. At some point, the market is going to get over its concerns about deflation and become concerned about inflation – that will be the real inflection point for gold. The Federal Reserve, the European central banks, the Swiss national bank, and the Bank of England have drastically increased their balance sheets. Huge amounts of money supply growth will be sending so much money sloshing through the system that it will eventually generate a bad case of inflation. Though inflation isn’t apparent today, stimulus packages and bailouts mean much more money in the system, which is classically inflationary. Historically low U.S. interest rates, U.S. dollar weakness, and the longer-term inflationary pressures of the Federal Reserve throwing trillions of dollars at the U.S. economy make the environment favorable for gold and other tangible assets. Of the major assets, only Treasuries and gold have escaped the selling panic that has gripped the markets. Rushes on gold have caused mints around the world to run out of popular gold coins. Because of the inflationary impact of government bailouts, analysts think that when gold reaches $1,500 it will be the floor, not the ceiling.
5. The Dollar
The dollar has benefited from the global flight from risky assets, as well as the unwinding of bets made with borrowed dollars. That has come as a surprise to many who expected that increased government spending and a collapsing U.S economy would cripple the dollar. In the longer term, the dollar’s health remains dependent upon foreigners’ appetite for U.S. assets, which will decline as the economy falters and the government continues to inject additional liquidity. Dollar weakness, plentiful liquidity and policy reflation will be persistent themes in the future. Massive fiscal and monetary stimulus has weakened the dollar, whose current resurgence stem mainly from the European debt crisis. Once that crisis rears its head in the debt-burdened United States, the dollar's weakness as a currency will be evident to all, and its role as the world's reserve currency will be in jeopardy.
Gold Prices: Expect a New Breakout
We expect to see a new breakout in gold prices once the dollar softens more decisively and once reflationary policies gain economic traction. The current gold price indicates that U.S. monetary and fiscal policy is finally getting ahead of the deflation curve. Liquidity conditions will be easier and easier as the year progresses – part of the fight to support the economy and reduce deflationary pressures. Such conditions are consistent with higher gold prices, and we expect to see gold prices continue to rise, with a breakout to $1,500 becoming a new floor.

Credits: http://www.blanchardonline.com/gold_as_investment/gold_rise.php & http://en.wikipedia.org/wiki/Gold_as_an_investment & http://www.wisegeek.com/why-does-the-price-of-gold-rise-and-fall.htm


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