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Five Facts to Remember About Buying or Selling Gold

April 24, 2013 - After the recent price drop in the gold market, many investors took to considering the market from a different perspective. Though price dynamics may indicate a bottom has been established and the price is set to again resume its bull market, a look again at the gold market may be helpful.

According to Forbes, no one knows why the downturn occurred in the gold market, and one can only postulate on whether the price move down was a good thing. It is entirely possible investors with large positions were forced to sell and that, in part, accounted for the initiation of the price slide. When the ball gets rolling, that same scenario engulfs more investors with larger positions.

It is important to remember in this type of market there is a difference between paper gold and physical gold. Paper gold has an effect on the price of physical gold even though the contracts are not actually backed by the physical metal. As the gold price dropped on April 15, about two months of the world’s gold production was dumped on the market. However, this was not possibly real gold but rather the promise to deliver gold or the equivalent in cash.

Many people who invest in gold are concerned about inflation as an effect of the Federal Reserve’s quantitative easing program. Arguments about inflation vary widely, but undeniably we have seen price increases on real goods such as food.Inflationary concerns from quantitative easing are long term, though if investors begin to think that no inflation will occur it could drastically affect the gold market.

Often, gold investors state concerns about the abandoning of the gold standard by the U.S. dollar in 1972 under then-President Richard Nixon. Some believe the U.S. should return to the gold standard in order to bolster the U.S. dollar as a stable currency. Numbers indicate, however, that with the amount of dollars in circulation it would require gold to be priced at a million dollars an ounce or more in order to back the U.S. dollar, which is likely unfeasible.

Gold is a store of value, and the most trusted store of value historically, but it is not stable in paper markets. The U.S. dollar is not backed by gold and thus the price of gold valued in U.S. dollars may vary widely. Gold will always be worth something significant, though the U.S. dollar may not. The goods and services that could be bought by gold does vary over long periods of time in human history and based on the civilization, but it always bought something. In Rome, an ounce of gold was equivalent to the living needs of an individual for one year, including housing, food, and clothing.

Gold has a place both as a commodity and as a prized part of human life. Undoubtedly, gold is more than just another metal extracted from the ground. Gold in the form of jewelry and adornments has always been used as a status symbol for deep cultural reasons. Current markets place gold as an investment also, however, which varies and diversifies the meaning of gold.

Regardless, gold will always have value, intrinsically and by market standards, as a means of trade and living, and both as a monetary and cultural metal.


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Jonathan Monroe

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