The distinct uptrend in gold has gotten a significant amount of attention lately. When trying to analyze this movement, the surge in oil prices from a short while back seems to be a quite good point of comparison. I believe that the run up in gold has many of the same key drivers that the run up in oil did. I wrote these two pieces about two years back, during the surge in oil prices from about $30 a barrel to about $150/barrel:
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After reading these articles, do you think there is a valid comparison between the current uptrend in gold and the former uptrend in oil? Whether you agree or disagree, how does your conclusion affect your investment strategy?
(It may be helpful to discuss this with your teammates and post an answer as a team.)
If anything, I think that the comparison is even more applicable. Unlike oil prices which is controlled by OPEC ( which is Organization of Petrollum Exporting Countries), there is no body that sets the price of gold. Gold's price is based on supply and demand, and of course the currency. I think it is a clear trend, that as a currency's value drops, prices raise (naturally). Also, as supply decreases, price often goes up in order to try to make up for the missing revenues. I think that whenever supply decreases and/or the currency's value decreases raising prices can be expected.
ReplyDeleteI agree with Eddie on this one. There does seem to be a comparable uptrend between gold and oil. LIke Eddie said, the comparison now a days is even more obvious. The price of gold is definitely not a set price. There is a balance in the price and supply. If the price decreases, supply increases, and vice versa and this seems to be apply to both oil and gold.
ReplyDeleteYes, there is a valid comparison between the current uptrend in gold and the former uptrend in oil. If nothing else, the precedings in the market today are great proof. With Ben Bernanke's news, the dollar declined and gold went up. As mentioned in the post, "when all else is held constant, if the value of the dollar decreases, then the number of dollars you would need to spend to purchase that same barrel, bushel, or ounce would increase by that same amount." That virtually sums up what happened today (for the most part anyway, as there are other factors of influence).
ReplyDeleteRegarding investing, if we follow the aforementioned concept, it seems that there is little "profit" to be made off of gold. Let us asume that the value of the dollar declines due to inflation. Although the amount of money we would receive from gold was higher than the amount we invested, that money would be worth less than what it was when we originally invested (due to the inflation). Therefore, we would end up with a net gain of 0. However, that does not mean that we should ignore gold. If we leave our money alone, and the dollar declines, then we have a net loss (that original dollar is no longer worth a dollar, it is worth less, say $0.90; this gives us a net loss of $0.10). Investing in gold does not provide that "profit" we all seek, but it keeps us from losing money.