gold prices risingEverybody’s talking about it. Gold mania has arrived as people from all sectors of society jump on the yellow brick road to investment heaven. The cheesy commercials have invaded the cable channels inviting down on their luck Americans to trade in their jewelry or buy a small yellow magic coin for $1200. Apparently this stuff will save your butt by hedging against the dollar when the economic crash eventually destroys what is left of the green back.

I don’t know about you, but when a sound investment now becomes hip and everyone seems to be gobbling it up, it is now time for me to seriously consider getting off the gold train. Lessons from life have taught me that when the majority of the herd comes grazing on my once plentiful fields, that it may be time to start searching for greener pastures. But one thing is for sure, gold is the hottest investment going right now as it seems to be gaining in value every day.

So what’s causing this precious metal to gain so much value?

The primary cause of the rapid rise in the gold price for the past three years is the increase in investment demand for this commodity. The emergence of gold exchange-traded funds (GETFs)in 2006 allowed mutual funds to finally invest directly in gold. Prior to this, they were only able to indirectly invest in gold by buying shares in gold mining companies. They had very little impact on the price of gold before the creation of the GETFs because these funds were not allowed at the time to purchase gold bullion.

GETFs are mutual funds with gold as the underlying commodity and they are listed in stock exchanges just like stocks. They offer the benefit of permitting the investors to take part in the market for gold bullion while not being required to physically possess the gold bullion. The GETFs are traded in the stock exchanges and their prices follow the price of gold.

Therefore, the GETFs decrease in value if gold prices go down and increase in value when gold prices go up. Because of this relationship, the prices of gold and the GETFs are interlocked, thereby causing a rise in the price of gold if the demand for GETFs increases. 

Today ETF’s are soaring, today hitting records of $1,227 an ounce. The yellow metal is becoming a safe haven for investors hedging the dollar’s rapid decline. Gold is up 7% from last week and 25% over the last few months.

Some believe that many of these hedge funds, as well as foreign countries are secretly betting against the dollar by pulling out of the green back and buying massive quantities of the yellow stuff. Billions of dollars worth are being snatched up when it become available on the market indicating that serious investors, as well as whole countries are stock piling gold.

In the Al Jeezera video below it explains that Gulf states have held secret talks with Russia, China, Japan and France to replace the US dollar with a basket of currencies in the trade of oil.

 

With the entry of mutual funds as investors in gold, the price of gold was bound to go up because of the rise in demand. This was also helped by the inherent advantages of gold as an investment vehicle, such as its less volatile nature and its ability to hedge against inflation among others.

However, it has now become main stream making a lot of investors like China nervous about a possible bubble in the near future.

Hu Xiaolian, the vice-governor of the central bank, said Beijing would not buy gold indiscriminately.

“We must keep in mind the long-term effects when considering what to use as our reserves,” she said. “We must watch out for bubbles forming on certain assets and be careful in those areas.”

China announced this year that it had quietly doubled its gold reserves to 1,054 tonnes, the world’s fifth largest holding. India has also joined the rush, gobbling up half the IMF’s gold sale.

Moe Bedard
My name is Maurice "Moe" Bedard. I am the founder of America's #1 Mortgage Forum, LoanSafe.org. My online work has been featured in the New York Times, LA Times, Fox Business, and many other media publications.