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Gold Hits New Record: What's Driving Prices So High?

Bad news is typically good news for gold prices, and right now there's enough bad news circulating that gold briefly hit a new all time high of $1,476 an ounce. Here's what's driving the latest run-up:

  • Geopolitical uncertainty. Between the fighting in Libya that threatens the stability of the world oil supply, the political upheaval in Egypt, Japan's struggle to get its economic engine moving in the wake of the Fukushima earthquake and tsunami, and the sovereign debt crisis that bedevils the European Union -- Portugal just officially asked for an EU bailout -- we've got a confluence of worries. In isolation, each might be more easily absorbed, but in aggregate they ratchet up the global blood pressure, and that's when gold becomes most alluring.
  • The U.S. isn't exactly a roaring safe haven. Typically in times of global angst, money flows to U.S. investments. When the financial crisis hit in the fall of 2008, for example, the U.S. dollar strengthened against foreign currencies. But with our debt load causing many to worry about higher inflation and a lower dollar in the future, the U.S. is losing some of its safe-haven luster, making gold look all the better.
  • Where else are you going to park your money? A Treasury bill yielding less than 0.50 percent isn't exactly crowding out gold right now. Part of gold's popularity is being driven by a lack of better investment opportunities.
  • Fears of higher inflation. Gold is a classic hedge against higher inflation and a weakening dollar, since it holds its purchasing power when the dollar's value declines. And right now, concerns about inflation are beginning to creep back into the global economic dialogue. While the Federal Reserve is grappling with whether it needs to respond to a rise in inflation in the coming months, the European Central Bank (ECB) pulled the trigger yesterday by raising its benchmark interest rate for the first time in three years, from a record low of 1 percent to 1.25 percent. Sure, that's still low, but the concern is where things might head from here.

Can the Gold Rush Continue?

Standard Chartered, a large Asian bank, said yesterday that gold could reach $1,650 an ounce next year. And it says continued strong demand from Asian markets -- the Chinese have recently been large buyers -- could push the price to $2,100 an ounce in 2014. But there's a potential countervailing force that may come into play. As noted, the ECB has already begun raising rates, and the question in the U.S. is when, not if, the Federal Reserve will start doing the same. And when yields on government securities begin to rise, that could make them more attractive to investors who are now enamored with gold. Of course, if rates start to rise amid spiking inflation and a declining dollar -- see above -- gold could still remain in demand.

Keep in mind that history suggests just when we think the world is coming to an end and gold is the only "safe" place left, the story can end up being quite different. Back in 1980, gold hit $820 an ounce amid soaring inflation; if prices had merely kept up with inflation since then, gold would be trading at $2,200 an ounce today, much higher even than current levels. So much for a sure thing.

Photo courtesy Flickr user BullionVault
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