In recent months, investors have flocked to gold, helping to drive
up its price to record highs. Some market watchers have attributed the gold rally merely to investors seeking a shortterm inflation hedge or a perceived !safe haven" investment in the face of a slowing global economy, ongoing global sovereign debt problems and #riday$s downgrade of %S debt. &old prices, however, have been on the rise for a decade and I believe there are a few key reasons why. #irst, high gold prices can$t be blamed on fears of nearterm inflation. 'hile investors have historically paid a higher premium for gold when inflation e(pectations are high, inflation e(pectations have receded since a spring spike. In addition, the last decade has been characteri)ed by low inflation in most developed countries. *ut the rally in gold can be partly e(plained by longerterm inflation fears tied to deficitrelated spending that would increase the money supply. 'hen deficits are high, investors rationally worry about whether the government will ultimately deal with large deficits by creating a surge in the money supply. +oday, this appears to be a growing concern among investors and as the %S fiscal situation remains precarious, this may support gold prices, even in the absence of any nearterm signs of inflationary pressures ,ising gold prices are also e(plained by another sort of inflation - inflation as the erosion of the purchasing power of the dollar. .istorically, the deterioration of the dollar has been a more important determinant of the performance of gold than traditional inflation. &old tends to do best when the dollar$s value is eroding and we have seen a significant pullback in the value of the dollar versus other currencies over the past / 0 years. 1art of the relationship between gold and the dollar is mechanical. As gold is valued in dollars, a declining dollar by definition will lead to higher gold prices. .owever, the relationship between gold and the dollar also reflects a second dynamic. In those periods when investors are uncomfortable with any fiat currency, including the dollar, gold is the natural beneficiary - and increasingly these days, so is the Swiss #ranc. So ironically, if we continue to be in an environment where the #ed helps keep real interest rates low, we$re likely to see an environment that continues to be supportive of gold and other commodities. Investors seeking a shortterm inflation hedge in the face of a slowing global economy, ongoing global sovereign debt problems. high gold prices can$t be blamed on fears of nearterm inflation. 'hile investors have historically paid a higher premium for gold when inflation e(pectations are high, inflation e(pectations have receded since a spring spike. the deterioration of the dollar has been a more important determinant of the performance of gold than traditional inflation. we$ve been in an environment where real rates have been at historically low levels. 2ow real rates mean the opportunity cost of owning gold is low. 3ffect on rising gold price on common people 'ith gold prices surging past another record to nearly 45,677 an ounce, the astonishing rise of the precious metal in financial markets has thrown up some peculiar sideeffects in the real world. 1olice warned last week that thieves are targeting Asian women in east 2ondon for their gold jewellery. In one incident in 8anning +own, a /7yearold disabled woman in a wheelchair had her necklace snatched from round her neck. +he %9$s first gold vending machine opened at 'estfield Shopping 8entre last month. A 5g coin costs :;7 or a /<7g bar is :57,/<7. *etrothed couples in 1akistan are having to delay their weddings, because the gold price is too high. According to tradition, families should provide several !tolas" =almost half a troy ounce> as dowries. A retired croupier and his wife, ?avid and @aureen Somers, sold their house in 1oole in /77; and bought gold instead. +he price has Auadrupled since then from 4;76 per ounce to more than 45,B77 now. +he jewellery shop owner, *alkrishna Cernekar, the two women entered the shop on the prete(t of buying a gold chain. 'hile the chains being shown to them, one of the women diverted the shop ownerDs attention, while other one picked up the chain. +he chief e(ecutive of 8ash 8onverters last week signed an agreement with 2ondon police saying the chain would share information about any suspicious gold brought into the store. 1olice said there have been reports of some !cash for gold" shops receiving !bloodstained necklaces". Inflation and &old &old, being a highly pri)ed metal whose supply is both limited and increases slowly, has long been used for money. 1egging money to gold, known as a gold standard, usually works to keep the money supply in balance with the goods and services available, thus keeping prices stable. 'hile inflation rarely occurs with a gold standard, there is at least one major instance of inflation under a gold standard and this was the inflation that swept 3urope in the si(teenth century following the Spanish conAuest of the A)tec and Inca 3mpires in the Eew 'orld and the subseAuent transport of boatloads of the massive gold holdings of these empires to 3urope. Spain didnDt have to convert all of this gold to money. @uch of flowed directly into the hands of investors who financed the e(peditions and those who participated in them. *ecause it is coveted by all due to its value, gold can be e(changed directly in payment for purchases coining gold as money merely facilitates e(change which can also be also accomplished by using gold itself. Another way inflation can result while on a gold standard is through what is known as fractional reserve banking, which is the practice of backing paper money with gold but issuing more paper than there is gold to back it. +his is an ancient practice and can be practiced by either private banks or governments. 'hen done in moderation this can work =modern banking systems, including that of the %nited States, does this using checking accounts and other financial instruments backed by a smaller supply of official currency> so long as people have confidence that they can e(change their gold backed notes for the gold backing it. +his practice of fractional reserve banking began in ancient times when people, not wanting to have to carry gold around with them or leaving it unprotected in their homes, would entrust it to a merchant who had a secure place to store it. +he merchant would issue a receipt in e(change for the physical gold and people soon found that, rather than running to the merchant to withdraw their gold every time they made a purchase, they could simply pay for their purchase by handing over their receipt for the gold rather than the gold itself. %pon discovering that most people simply e(changed receipts rather than physically claiming the gold, merchants offering secure gold depository services found they could increase their revenue by loaning out the gold and changing interest =thus earning interest on the gold they held in addition to the fees they charged to the owners of the gold for its safekeeping>. In most cases the loans consisted of a receipt for the amount borrowed rather than physically handing over the gold. Of course, if this lending became e(cessive people would become concerned and begin e(changing their receipts for gold. 1anics would often ensue whereby everyone rushed over to withdraw their gold and when the merchant was unable to honor all of the receipts, the holders of nonredeemable receipts would be left with worthless pieces of paper. 'ith the rise of banking, panics like these became known as a run on the bank. %ntil modern times when governments stopped backing their money with gold they found themselves in the same position when they tried to issue more currency than there was gold to back it. As citi)ens and foreigners began to lose faith in the currency they would begin converting their paper money to gold thereby reducing the governmentDs gold holdings and peopleDs faith in the currency. .ow to Interpret the ,ise in &old 1rices - The Lucrative Derivative Report &old has been one of the best performing assets over the last year, as prices have skyrocketed to record levels. It seems as though we are talking about a new record in prices nearly every week, and the trend appears set to continue going forward. So how can we interpret the rise in gold pricesF +here are two issues to discuss here. +he first is, why is it that investors want to buy gold, and the second is, what is the impact of rising gold prices on the rest of the economy. +he two issues are obviously linked, but letDs discuss each one in turn. Investors buy gold primarily as a safe haven. &old is known to perform well when the rest of the economy is in a poor state, and thus investors buy gold to protect themselves financially. +hus, we see gold prices rise whenever there is uncertainty about economic prospects or in financial markets. #or e(ample, both the American and 3uropean debt crises have led to increases in demand for gold. ,eviewG Hes truly gold rates are skyrocketing and will cross the ,s I777Jgm mark shortly and will affect mainly people who want to buy gold specially during marriage seasons as it has become a custom for the brides to carry gold as though grooms life is dependent on gold rather than the person getting married to. +he situation is so bad. +he real wealth is the people and children we have around us rather than the material but the world cares for none and are mad in buying gold only to leave behind after their death and miss the real treasures of life with their kith and kin. Hes it$s very difficult to buy gold for common peoples now a days as daily the gold rate is going higher and higher. And in marriages it$s compulsory for girls to carry some gold to her husband house, as it has become a culture in India. If this culture is removed then it will be lot of help for common man to do the marriage of his daughter. K+oday, the market rate of gold is over ,s /B,;77 per 57 gm, so it is much more lucrative for criminals to snatch a gold chain and flee. A total of ;;< cases of chainsnatching were registered in /755 with a detection rate of nearly /5L. In comparison, only ;5M cases were registered in /757 but the detection rate was a low NL. 'hy the rates are rising at such a high rate is difficult to predictF +here may be various reasons for it. One such reason is the rise in the value of the gold in the international market due to the countries who have large reserves of gold with them. +hey tend to increase the prices when they see that the demand for gold has increased due to festive season or shortage of supply from the other countries. 1rices of gold also rise when the dealers increase their profit margins and the branded companies in order to compete also does the same.