Goldbugs on the march

The price of gold hits a 25-year high. Why?

By Andrew Leonard
April 7, 2006 4:09AM (UTC)
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The price of gold hit $600 an ounce on Thursday, its highest level in 25 years. What's going on? Prices are high for commodities of all kinds these days, from oil to copper to sugar, but there are usually concrete explanations for that, mostly having to do with surging demand from the booming Chinese and Indian economies.

A survey of the financial press today indicates that everything's going on. The desire for gold appears to be the measure of all things. When the dollar is weak, investors turn to gold, and the dollar has been sinking for months. When oil prices rise, inflation threatens, and gold is seen as a hedge on inflation (oil prices rose again today, to $68 dollars a barrel). Current events -- anouncements that Zimbabwe may nationalize its gold mines, or that Iran is testing new weapons designed to sink ships in the Gulf, make people nervous. So they buy gold.


Goldbug fever also reflects trade tensions between the U.S. and China. The U.S. wants China to upwardly revalue its currency. But to do that, say some analysts, China would have to stop buying so much U.S. debt, which has been propping up the dollar. Instead, China might start buying more gold.

Some analysts say that new mutual funds that invest in precious metals have made it easier for average investors to get into gold. Gold has also historically risen when other commodity prices are rising, just to keep them company. And then there's the good old speculative bubble -- people are buying gold because they think the price will keep rising, and their speculation ensures that it will keep rising.

Oh, and while gold doesn't necessarily go directly into digital cameras and DVD players the way silver does, China and India are demonstrating a new kind of demand. Their burgeoning middle classes want jewelry! So they're buying more gold.


Most often, investors buy gold when they're really worried. But the International Monetary Fund announced a few days ago that it might raise its estimate for global economic growth in 2006 to 5 percent. So forget about the rising price of oil, the threat of inflation, possible trade wars, and all that jazz. But maybe you should keep an eye on the price of gold.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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