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Date: 24-Mar-2017:



USDINR opened at 65.51 and closed at 65.41 on Metropolitan Stock Exchange of India In India.


Tuesday, May 31, 2011

Reason Behind Rising Gold

Gold prices have been rising, and many experts cite demand from the growing economies of China and India as the reason. But that's wrong. Gold is trading higher because of loose monetary policy and the purposeful devaluation of the US dollar. Since gold generates no cash flows, and in fact ownership costs money (storage, and perhaps insurance), divining its value is really impossible. Gold, the "barbarous relic", as Keynes referred to it, is worth what others will pay for it, by definition a speculative non-investment.

Yet Gold has historically been a reliable store of value. An ounce of gold has been worth about 15 barrels of oil for decades. An ounce of gold at $1,500 in 2011 buys 15 barrels of oil at $100 each, much as a $500 ounce of gold bought 15 barrels of oil at $30 in 1981.

The changes in the nominal price of gold simply reflect the persistent weakness of the dollar, as the US has been pursuing policies that virtually guarantee a weaker currency. While gold's nominal price has been going up, as has almost everything else except housing, its real purchasing power has remained constant.

Pursuing this course of weakening currency has certain pernicious side effects, not the least of which is mis-allocation of capital. Take the money now flowing into the commodity producers. The weak dollar led almost all commodities to trade at nominal highs, but this is an illusion. Commodity rich countries are enjoying prosperity, but this is part of a regular boom and bust cycle, and the bust never fails to arrive. Once the inevitable tightening comes, this chimera will all go away.

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