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Why Gold won't go too far?

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Thursday, August 17, 2006

Many analysts expect that, according to its history, when the US dollar inflates, gold will go higher and higher like what happened in the early 80s, when Gold made its highest ever peaks.

Why analysts think that gold will break its 80s records and will go far beyond $700 per ounce, some of them expects $2000!?

Actually they sit on top of rules that are proven valid nearly so far, but not anymore. Here I'm going to list these rule to tell why it's not valid anymore form my point of view:

1- Gold is not anymore the only world alternative currency

Gold was and still considered as an alternative currency to the US dollar. The US dollar is "the world currency", everyone accepts it, and all national banks have reserves of it. Even more, some countries around the world don't issue their own national currencies, instead they use the US dollar. So when it starts -the dollar- loosing its purchase power, the world will move gradually into some other accepted currency and more stable than any national currency -Gold- to protect their money from deprecation. Gold, was the only available alternative, this is absolutely correct before the Euro! Why Euro, because it is now, very similar to the US dollar, very trustworthy, and the Euro-Zone has some of the most powerful and stable economies in the world. So the gold is not anymore the ONLY alternative currency to the US dollar, and lately we hear that some national banks are diversifying their reserves mainly between US dollar, Euro and Gold.

2- Gold is a Luxury Item!

Gold as a commodity, has some special features, that prevent its price of going too high. Some of us argues that the precious metals reserves -mainly Gold- are declining, while the demand is increasing, supported by the world population growth. This is absolutely right. But as the Gold jewelries are considered a luxury commodity, people have always pre-defined budgets to buy such things. So what happened when the prices went up, that the demanded volume declined to fit consumers budgets. And this is clearly shown in the World Gold Council report for the second quarter of 2006, that overall demand was down 16% from one year ago. India was most affected by the volatility, declining 43% when compared with the second quarter of 2005. Saudi Arabia was next, reporting a 32% decline, followed closely by Egypt with a 30% drop. China, however, was less affected than others, falling just 2%, but Hong Kong by itself was down 27%. The United Arab Emirates fell 19%, Taiwan 18%, Italy 12% and the US 10%. And here again, the great market mechanism, demand and supply creating the market prices, which will reverse back any extreme move in the prices, is shown greately in the gold market.

My conclusion, if the under-ground gold reserves are vanishing, if the national banks lost their reserves forever in the jewelries market, or in other words on the women's necks, and no way to get it back, gold will not find its way to $2000 per ounce as some people argues, because the demand will react against these high prices.

Wikipedia: United States dollar
World Gold Council report


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