Why is the price of gold continuing to rise? Why, if the fundamentals are low enough to be negative, are the prices of some commodities skyrocketing? Gold has actually reached $1007 an ounce, the highest it has been since March 2008. That means there has been a 12% increase since April 2008.

What are the reasons for this? You might be tempted to think its because of the basics, but its not. The World Gold Council published a report that states craving for gold accessories has declined by 22% and industrial uses for gold has declined by 21% since 2008. The only component that has remained high in the current gold arena is speculation, which has grown by 46%.

Another reason is that gold is often considered to be a good hedge against inflation leading many to be attracted to this precious metal. But according to statistics listed by the Labor Department, the consumer price index for gold fell 2.1% in a single year. That is the opposite of inflation. So what exactly is being hedged against?

Because the Federal balance sheet is getting larger, the currency it is based on is losing it’s value. Deflation will only cause our currency to further lose it’s value, and inflation is not a pleasant option; it appears that either way things go, gold will benefit.

The US interest rates are low which is also a large factor when it comes to supporting gold. Consider the London interbank dollar rate (which is the method used by banks to charge other banks for loans) that has fallen to an unprecedented low of 0.314%, meaning it is down from 4.8% in October of last year. Unlike bonds, gold does not earn interest, which means there is an opportunity cost associated with having gold. But with the dollar worth as little as it is now that opportunity cost is rendered insignificant.

What this means is that the fundamentals have absolutely nothing to do with the high price of gold; it is dependent solely upon financial speculation. This means that there is absolutely no way to know what is going to happen to the price of gold in the future.

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