Make Money With Gold Investments

Why Gold Prices Are So High 2012

Gold prices fell sharply in trading today, posting their biggest one-day loss in over a month. Gold fell following the release of better than expected non farm payrolls for the month of January. prices edged modestly higher Tuesday, capping a January gain of 11.1% and contrasting starkly against the 10.5% meltdown seen during December -- although gold still closed 10.2% higher in 2011

Why Gold Prices Are So High
First, high gold prices can't be blamed on fears of near-term inflation. While investors have historically paid a higher premium for gold when inflation expectations are high, inflation expectations have receded since a spring spike. In addition, the last decade has been characterized by low inflation in most developed countries In ending the month of January, gold prices tacked on $6.00, or .3%, to $1,740.40 an ounce in the April futures contract on the Comex in New York. Gold prices moved from an intraday low of $1,727.00 to a high of $1,750.60. Euro zone debt issues remain attractive for gold going forward, according to some analysts.

For this is essentially a "real" story about gold, in which the price has risen because expected returns on other investments have fallen; it is not, repeat not, a story about inflation expectations. Not only are surging gold prices not a sign of severe inflation just around the corner, they're actually the result of a persistently depressed economy stuck in a liquidity trap — an economy that basically faces the threat of Japanese-style deflation, not Weimar-style inflation. So people who bought gold because they believed that inflation was around the corner were right for the wrong reasons.

Can Gold Prices Fall To $1500 Per Ounce?
According to Tom, this correction in the gold market can last for another one to two months. The weak rally in gold indicates that the rebound is over. Moreover the concerns about the Euro zone debt problems have not supported the gold prices. The stronger US Dollar rally is further hurting the metals. However according to Tom, the monthly OBV (on balance volume) analysis indicates that the major trend in the gold market is still positive and up. According to him the possibility of a strong rebound after gold prices reach $1500 per ounce mark are there.

To sum up, whether we're looking at large moves in the real interest rate over shorter periods, or fairly steady real interest rates over longer periods, there are patches using Krugman's own data set that are at complete odds with his model. Krugman and DeLong think they solved their pesky problem of rising gold prices, but they really haven't. They came up with a qualitative model in which sudden drops in the real interest rate lead to instantaneous upward shifts in the price of gold. Seeing this result, they declared, "Mission accomplished!" and cracked open some beers. But there are several other implications of their model that fail to match the data.

If we study the dynamics of Krugman's model, we see that it implies that sudden and large changes in the real interest rate should lead to one-shot adjustments in the price of gold in the opposite direction. This is the mechanism, after all, by which Krugman thinks he has adequately explained the sharp rise in gold prices over the last few years.