Why Gold is Soaring?


During the last two years the price of gold doubled, reaching $1,000 per ounce on March 13th. What has caused that huge increase in the value of the yellow metal?

First of all, since gold is priced in U.S. dollars, the weak dollar and the U.S. economic recession are propelling its price up. In fact, gold had rallied 38 percent since the Federal Reserve began cutting the overnight lending rate on September 18.  Moreover, it is believed that Fed is more concerned about growth than inflation and gold is perceived to be an anti-inflation hedge.

Another factor in gold appreciation is high investment demand. Retail investors can now easily access the market through gold derivative instruments. It is said that exchange-traded funds own as much precious metal as central banks. In addition, developing markets like India and China are trying to allocate somewhere their huge foreign currency reserves.

Furthermore, a declining mine production and a limitation of gold sale by central banks under the Washington Agreement are adding up to gold run. In fact, over the next three to five years, the lack of investment in the gold industry, caused by several take over acquisition strategies, is likely to cut the production 10% to 15% below market expectations, according to Goldman Sachs


Anna Fedec, analyst@tradingeconomics.com
4/1/2008 2:50:33 PM