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Inflation Fears Push Gold Near Record Price

Here at The Ticker, we've been waving the yellow caution flag on inflation for some time.

Now, investors appear to be agreeing.

Gold was pushed to near-record price levels today, edging toward $1,000 per ounce. It's up 11 percent from an April low. Gold has only risen above $1,000 twice, both times during the current economic crisis.

Typically, people buy gold for security when stocks swing wildly.

Now, however, another reason is pushing gold higher -- fears of a return to 1970s-style double-digit inflation. Or worse: the 100 percent hyper-inflation of 1920s Germany and modern Latin America from time to time.

The U.S. government has been printing money like there's no tomorrow -- which, last October, seemed to be the case -- in order to put liquidity into the system and stimulate the economy.

As is the case with anything, when there's more of a thing, it's worth less. The rising amount of paper money in the system cheapens each dollar. This means it takes more of them to buy anything and the result is high prices.

Along with inflation's high prices come high interest rates. Which is terrific, if your 3 percent certificate of deposit soars to 15 percent, like they did in the 1970s. But it's bad in just about every other way: Interest on credit cards goes up, as it does on car loans, mortgages and so forth. Everything gets more expensive.

The Chinese and other nations are worried that the U.S. is trying to spend its way out of the recession by printing money. They are questioning the stability of the dollar.

What does this have to do with gold?

When some investors worry about inflation, they like to buy gold, because it's an actual, physical, substantial thing that has value in itself, unlike paper dollars. It can be a hedge against inflation -- its price will rise if the dollar's value drops.

Unlike dollars, gold is a finite thing: There's only so much of it on the planet (which is one reason why it's impossible to base a modern economy on the gold standard). So when demand for gold goes up, like now, its price goes up.

The Federal Reserve has downplayed fears of inflation as the economy moves forward and tries to recover. But all those dollars will have to be absorbed into the system, and the concern is that there are too many of them -- that the economy will be like a sponge that gets too saturated to soak up any more water.

-- Frank Ahrens
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By Frank Ahrens  |  June 4, 2009; 5:06 PM ET
Categories:  The Ticker  | Tags: gold, inflation  
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Comments

Gold is not much of an asset for the masses due to their inability to understand its value. They buy it when panic sets in and they sell it in a panic at the first sign of a drop in price. Whilst your article contains many truths, it has been my experience that such favourable editorials usually herald a drop in price within days. If preservation is the goal then gold is the asset of choice. Profitability on the other hand is not dependent upon gold's attributes but rather on one's timing in buying and selling it.

Posted by: psouleles | June 5, 2009 8:06 AM | Report abuse

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