Why Are Gold Prices Pushing Record Highs?

The thing about commodity prices is that they can be affected by a host of different factors. Take corn for example. Global corn prices could be high because a drought in Europe ruined many crops, despite the fact that the U.S. could be having a record harvest. The same goes for any commodity (NYSE:RJI) — its price is affected by many different factors that might have little to do with us directly.

But such is not the case with gold (NYSE:GLD). A confluence of factors and events from every corner of the globe are all individually pushing up gold futures, which generally gain in times of crisis. But with so many different factors pushing up prices at the same time, gold prices have been skyrocketing. So here’s a look at why the Gold Standard is returning as a symbol of stability in a shaky global economic climate:

  • The U.S. has been unable to recover from the recession. Growth hasn’t been what it should. The housing market is a huge weight on the economy, and jobless figures continue to rise. The Federal Reserve’s second round of quantitative easing was meant to put money into the economy to help it grow, but instead devalued the dollar against a host of other currencies. And now we could be looking at QE3, though Fed chairman Ben Bernanke has not yet confirmed that which some hope for and some fear, questioning whether a QE3 could be successful if QE2 wasn’t able to accomplish all it set out to do. Because gold is prices in dollars, inflation causes gold prices to rise, one factor in why they are currently so high and the reason QE3 could push gold as high as $5000, according to one U.S. banker.
  • The U.S. gets two bullet points for two very real threats to our economy, the second being the government’s inability to resolve debt ceiling issues. President Obama and lawmakers have been debating over the budget for months and continually putting off resolutions because of the unwillingness of both Democrats and Republicans to cede ground to the opposition. Just ask anyone in the EU and they’ll tell you there’s nothing more worrisome than impending default, which our government inches closer to every day that an agreement isn’t reached. Default could seriously hinder already deficient efforts to boost the economy. And what do people do when they fear an economic downturn and depreciating currency? Invest in gold.
  • Asia’s loose monetary policies have actually created negative real interest rates, pushing citizens to clean out their bank accounts and find any other investment opportunity, which often comes in the form of property (which in the U.S. was once considered a solid investment), or oftentimes gold. And given the poor economic conditions of many western countries, China’s central bank has been accumulating gold instead of buying risky foreign bonds, pushing gold prices up while allowing treasury prices to fall.
  • China (NYSE:FXI), Russia, Brazil (NYSE:EWZ), India (INF), the Mid-East petro-powers have for some time been diversifying their $7 trillion reserves into euros in order to limit dollar exposure. But now with the debt crises in Greece, Italy, Portugal, Spain, Ireland and possibly more to come, the euro is no longer a safe currency. While the Swiss franc, Canada’s Loonie, the Australian dollar, and Korea’s won are all doing well, they are all too small. Now there are no safe-haven currencies left, pushing the idea of a gold standard that could protect against devaluing moneys.

So given the general global trend toward investing in gold to avoid currency-related losses, the world seems set to revive the Gold Standard. The time has come to “consider employing gold as an international reference point,” says World Bank chief Robert Zoellick.

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Utah has moved in that direction, officially recognizing gold as legal tender for tax payments. And the Swiss parliament is holding hearings on a possible Gold Franc. With so many struggling economies around the world, and the few thriving economies at risk of infection by way of investments, gold (NYSE:GLD) simply seems the safest route.