63. The Trend of Gold Prices
Seven years ago, the world price of gold peaked at $850 an ounce. It was
below $260 in 1998. Last week, it reached $400. The price in Vietnam is at
7.7 million dong per tael (one tael equals 1.32 ounces), and some project
that the price of gold may go up to 8 million dong per tael, if there is little
change in the exchange rate.
Why does the price go up so high? The explanation is easy during times
of inflation: all prices are up, so does the gold price; however, the world has
experienced deflation recently, so this can not be the explanation.
Some suggest that when the us$ interest rate is down, gold producers
have less incentive to keep money and tend to buy back the gold they have
sold forward, pushing the price up. It is true that the interest rate has been
going down in recent years. But this argument fails to explain the 1995-
1998 period, when both interest rates and gold prices went down together.
Central banks in the world hold over 30,000 tons of gold. Why don't they
sell gold to stop the price from inflating? Because their main function is
neither to trade gold nor stabilize its price. Historically, they have not been
good at selling high and buying low.
The possible answer? The dollar is weak and the us government has little
incentive to make it stronger given the huge us trade deficit. The Yen seems
unsafe given the Japanese government debt reaching 135% of GDP. The
Euro is no better, given the heavy budget deficit of large economies in the
block. Thus, gold has increasingly become the choice to store wealth.
When the demand increases, the price rises.
How far the trend will go? Don't look at economists for the answer. They
are only good at explaining past prices, not the future prices.
