Gold Price In The US Essay Research

Paper

The largest demand for gold is in jewelry and investments. Gold is known as a

metal that is easily used and has many industrial applications. Since gold is so durable and

luxurious, many people invest in jewelry, stocks, and gold bonds. Considering the fact that

gold is considered a world-wide valuable good, many economies have gold reserves to

help protect themselves in times of need. Nevertheless, factors of supply and demand have

contributed to the decrease of the price of gold, which has reached an all time low since

1978. This reduction has raised many concerns in the United States having them weigh the

different factors of the price, supply and demand, and consumption that may be affecting

the price change.

The price change commands attention since gold serves to indicate price stability

or inflation. Although, inflation is not as threatening in the United States because it is

more industrialized, the bigger fear is facing deflation with our countries gold currency.

Gold averaged 294 dollars per ounce in 1998, when at one time the prices were in the mid

$400-500 per ounce. Due to fact that gold prices have been so low, Central Banks have

threatened to sell their gold inventories fearing that gold is no longer considered the

ultimate store of value. Regardless, prices have continued to fluctuate in both directions

throughout the year, but it is important to weigh the different variables that are having an

effect on the price.

There are different factors associated with the supply and demand which have

caused prices to decrease. First of all, the record low prices in the past year has caused

investors to participate less causing prices to be determined largely on gold?s own supply

and demand fundamentals and the economic environment. The supply of gold declined by

less than 2% during 1998. The price reduction started to impact the mine production by

slowing the rate of manufacture growth by the end of 1998. When prices began to

weaken, this caused many mines to shut down, leaving low grade ore in the ground. This

alone is effecting the mine output and the cost to produce more gold.

On the other hand, the sales of gold jewelry are increasing at a record pace, since

the economy is strong, there are low gold prices, rising consumption rates, the emergence

of new discount chains, television shopping, and electronic chains (Haubrich, Joseph). The

growing demand for gold jewelry helped push gold usage in the United Sates to a first

time report of 428.4 metric tons in 1998, which is an 18% increase. Since consumption

has been driven in the United States, our economy is expanding and consumers are

spending more. During the past year, according to the JCK national poll, over 150

independent jewelers support the figures. They found that two-thirds of respondents

(68%) said they had a sales increase over the past year, while the other two out of five

(38%) claimed to have sales gains of 20% or more. Over all, the immediate gain for

jewelry retail due to the lower prices was a 15 % increase.

Using the statistics from the Commodity Price Index, for the last 12 months in

1998, it is evident that the second half of the years prices fluctuated. In the first part of

1998, the gold price ranged from $295.90 – 297.49, although it peaked in April reaching

to $308.40, which was the highest for the year. The price increase was due to higher

demand of consumers and the expansion in investments during that time period, in spite of

the fact, prices did not continue to remain as high for the remainder of the year. In fact,

the following month of May, dropped another $9.01, having the rate of gold at $299.39.

As for the second half of the year, prices still dropped but managed to stay in the low

$290?s making retailers prosperous.

Regardless consumers were happy with the lower prices, many investors and

miners have been struggling to feel the same towards the lower rate. Stocks have lost over

90% percent of their investments in gold and have many investors wondering if the value

of gold is depreciating. Miners too, are worried about the lower prices considering they

have been the major producers of gold in the past and in future markets. The idea that

central banks have discussed to sell partial amounts of their gold reserves has investors

worried with hopes that demand will not continue to decrease.

When evaluating the prices for the beginning of 1999, they have continued to be

unsteady and low, although there is hope for an optimistic future foe higher gold prices.

The price continues to range in the mid $250-290?s since gold is rather abundant even

though other nations released some of their reserves and placed it on the market. This

crude rate has caused some miners to be temporarily out of work and stocks are still very

low. The gold prices of April, averaged approximately $250 per ounce, and have remained

in that range the next three months.

According to ?The Economist,? the price of gold reported to increase at $260 per

ounce in August. Even though, more gold has been placed on the market the demand had

increased in the past month due to agreements and regulations placed to control the

amount of gold being released on the market. Having a better understanding with what

may happen in the future investors remain optimistic. By the end of September, prices

made a positive change showing a first mark in the 300?s, reaching a high of $315 per

ounce. Thereafter, prices in the month of October extended as high as $327 per ounce and

having November prices fluctuating in the lower 300?s. These price trends are stirring

some interest to investors and stock markets with hopes that gold will continue to have

higher trends in the future.

In a memorable essay, Milton Friedman wrote that ?millions of people all over the

world regard gold as ?money,? if not the only ?true? money? (Haubrich, Joseph). This is

one main reason why the price of gold commands attention especially since it is an

indicator of price stability and the possibility of inflation. Gold is also used as a

commodity, used in jewelry and by industry. It is important that details of supply and

demand do not affect the price its price. It is essential to keep in mind the different

outcomes the country may face from the mobility in the price of gold.