Why Are Higher Gold Prices Generally Seen As A Bad Sign

[churchill]

I would have thought in today's climate higher Gold prices would be beneficial to both the IMF , who want to raise funds through sales , and central banks who need assets to back their borrowing .

Why do many gold bugs think that central banks want to suppress gold prices when European and US Banks own large holdings ?

It seems that most central banks want to own more gold - apart from Europe & US ?

[trogers]

Problem is not that demand for gold is bad. If everyone uses their hard cash to buy the metal and then keep it under their pillow, that's good.

Problem is the margin trading: buying with money that they do not have, and creating an artifical demand bubble.

It is like the real estate speculation bubble in the past couple of years. Developers took the ease and speed of their units being booked as real demand, when in reality, people are queuing for that piece of paper in order to resell it at a higher price and make a profit. These people did not have the intention (nor the money) to transfer the completed unit - and now developers are facing rising inventories.

Edited April 9, 2009 by trogers

[churchill]

Goldfinger Brown Rides Again

"Fast forward to April 2009, and Goldfinger Brown is at it again, campaigning for IMF gold sales. What does it mean? Will he prove once again to be a contrarian indicator? We don't know. But it doesn't take a two-by-four to get our attention. In the meantime, we'll keep an eye on the old Alert sock."

Brown has done it once before - Can it be 2 in a row - Selling Gold before a big rise ?

http://www.safehaven.com/article-13033.htm

[flying]

campaigning for IMF gold sales. What does it mean?

You know China could buy all the IMF has ....easily

It would cost them a tiny % of the USD they hold.

They have said they would like to diversify

I doubt the IMF will sell all. Especially given today's currency climate.

Edited April 9, 2009 by flying

[gregb]

It's not really difficult to understand why governments don't like high gold prices. Once you get past all the FUD and rhetoric, gold is a competing currency. If you are the owner of a fiat currency, such as the USD, then you try to place your currency at a point relative to all the rest that maximizes your own benefit.

Now, if the alternative currency is another consuming economy, then a weaker currency may not be a bad thing. It will improve your export competitiveness, which will be consumed by the other economy. So being the strongest in the world isn't necessarily the best. There are tradeoffs.

Gold however, is an alternative currency with no upside for a fiat country. Gold doesn't consume anything. It just is. You can't expect a lump of metal to buy your widgets. It doesn't need food or oil. There simply is no reason why you would want gold to be priced high. The IMF, which is controlled by countries that use fiat currency, as a group don't want to see gold go up. That's giving business to their competitor. The fact that some or all of these countries own stock in their competitor as a hedge doesn't change their innate disdain for it.

[Naam]

campaigning for IMF gold sales. What does it mean?

You know China could buy all the IMF has ....easily

It would cost them a tiny % of the USD they hold.

They have said they would like to diversify

I doubt the IMF will sell all. Especially given today's currency climate.

IMF said a week ago 403 metric tons will be sold as agreed last year pending U.S. congressional approval.

[flying]

IMF said a week ago 403 metric tons will be sold as agreed last year pending U.S. congressional approval.

Interesting I did not know that as I am still on vacation & a bit news deprived

I will also do a search online

I wonder if a single buyer is a possibility? Any details on the sale mechanics?

Will it just be offered on the open market at spot or will it be an auction or?

Interesting..........

[Naam]

i have no idea Flying.

[khunjake]

I don't subscribe to this belief.

The gold price made its biggest percentage move from 2003 through 2007 when the global economy was going strong.

[Searcher25]

I would have thought in today's climate higher Gold prices would be beneficial to both the IMF , who want to raise funds through sales , and central banks who need assets to back their borrowing .

Why do many gold bugs think that central banks want to suppress gold prices when European and US Banks own large holdings ?

It seems that most central banks want to own more gold - apart from Europe & US ?

Gold has 3 (at least) common uses.

1. Industrial/medical use - about 300 tonnes a year. E.g., gold is used in manufacturing electronics since it is an excellent conductor that does not corrode. Dentists use it for fillings and crowns.

2. Jewelry. Anybody with a girlfriend or wife knows about this.

When the economy is good, demand for gold as an industrial metal and for jewelry increases. Given increased demand and a reasonably steady supply of new gold being mined, the price of gold rises. In the last few years, the booming global economy has fueled the demand for industrial gold. Increased personal wealth in India and especially in China has substantially increased the gold demand for jewelry. Correspondingly, when economies weaken the industrial/jewelry demand for gold also weakens.

3. Store of value. For the last 6,000 years or so gold has been coveted as a store of value (read money) if for no other reason that people know they can always trade gold for the things they need: e.g., food, shelter, sex, transport, etc.. Gold is especially coveted in the Arab world for this purpose. Look back to the late 1970s when gold reached $850/oz during the Iran/Iraq war.

In the last 60 years or so the U.S. dollar has been the major alternative to gold as a store of value. Holding US dollars, in the form of financial instruments, has the advantage of providing the owner of those instruments with interest payments. The amount of interest dependent upon the type of instrument held. Gold on the other hand does not bear interest. Just the opposite. A holder of gold incurs expenses to acquire and store gold.

What we are are seeing now though is an increase in demand for gold based on its use as a store of value. As gregb pointed out, national currencies today are fiat currencies - sheets of paper with ink on them and nothing to back them up except the promise to repay one sheet of paper with another. In the last 18 months or so we have witnessed a financial crisis leading to and accompanied with a sharp slowdown in most economies. The response of the US, UK and EU has been to print more money to alleviate the financial crisis and in some part to "stimulate" economies. Many believe (with good reason) that this huge increase in fiat currency will ultimately result in inflation. Potential (or probable, depending on your point of view) inflation combined with low interest rates make gold a more desirable store of value than fiat currencies such as the dollar, pound or euro. In a nutshell, people are buying gold and willing to pay higher prices for it because they do not trust the major currencies to maintain their value. As the old saying goes, " only a government can take perfectly good paper and make it worthless". And, as gregb stated this is not a perception that governments (issuers of fiat currency) are particularly fond of.