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CANADIAN PERSPECTIVE: Musings on the yellow metal

Various headlines have the price of gold soaring, punching upward through barriers, setting records, and takin...


Various headlines have the price of gold soaring, punching upward through barriers, setting records, and taking the TSX higher. This has been a wonderful week for good gold news.

 

As far as the price of gold goes, last year’s global economic meltdown was little more than a medium-sized setback. In July 2008, the price reached a high of US$977 per ounce, and in late October it bottomed out at US$712. A drop of 27% is more than a blip, but better than most. The TSX fell from its high of 15,068 in mid-June 2008 to a low of 7,567 in early March 2009, a drop of 49%.

 

This morning (Wed., Nov 18) the price of gold is flirting with US$1,150 per ounce and the gold bugs among us are cheering.

 

Part of gold’s glitter is due to the fall of the U.S. dollar among world currencies. The United States was hit particularly hard by the collapse of asset backed commercial paper (ABCP). People first lost their homes and then their jobs as the manufacturing sector took a huge hit. Unlike the situation in Canada, recovery in the United States remains elusive.

 

The questions on investors’ minds is: Can gold continue to go higher? Will the price hit US$2,000 or even US$4,000? Will it level off somewhere? Are we headed for a major price correction?

 

I wish I knew. My crystal ball is never crystal clear. But I can think of a few reasons to be optimistic.

 

The huge Chinese economy appears to be pulling out of the recession. Demand for iron and base metals in that country is growing again. It is an indication of solid growth, one that the rest of the world looks favourably upon. The added wealth has spurred the government to increase its gold holdings.

 

As long as the U.S. recovery lags, the U.S. dollar will be weak, and investors typically flock to gold when the outlook for the greenback is poor.

 

Many observers are predicting the rise of inflation in the industrial world. That would mean even more investors would seek gold as a safer bet.

 

Citizens of Vietnam have recently been allowed to buy physical gold, and that is thought to have increased demand noticeably.

 

As long as people are people their fascination with the yellow metal will remain. Whether it is for adornment, investment or its many industrial applications, gold will increase in value over the long term.


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