Why Is the Price of Gold Falling?

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The Atlantic’s  Jordan Weissmann writes:

Investors who love gold tend to think of it as a sort of bomb shelter. It’s supposed to be a secure place to park your money when the rest of the financial world is blowing up.

So some may find it surprising that in a year when Europe’s troubles have thrown the global economy into fits, gold has been a loser’s bet. The price per ounce of everyone’s favorite rock is down about 7 percent for the year and is off 15 percent from its September peak. According to a report released yesterday by the World Gold Council, total demand for gold fell 7 percent in the second quarter of 2012 compared to the year before.

Let this be a reminder that, no matter how long it’s been around, gold just isn’t that special. It’s a commodity that responds to the laws of supply and demand. Unlike commodities such as wheat or oil, which you can at least eat or burn for fuel, gold pretty much lacks any inherent value beyond what the market assigns to it. And in the past decade, much of the new demand that set gold off on a wild tear from around $300-an-ounce at the turn of the century to almost $1,900-an-ounce last year has come from two places: India and China. Combined, they account for 45 percent of the world’s demand for gold jewelry and bars.

Here we go again, the idiotic assertion that we can’t eat gold.  Most things we can’t eat, including hard copies of The Atlantic. One of the most important things to evolve in economies is a medium of exchange. It allows indirect exchange and a greater division of labor. It is an important driver of economic growth. Without indirect exchange via a medium of exchange, it would be pretty difficult for Weissmann to earn a living as a writer. Think about it, he would have to go around offering his columns for food and shelter. Do farmers and carpenters have a demand for his writings in sufficient quantity to provide him with regular food and shelter? …

image: flickr.com/cbcastro

2012-08-20 14:01:49

Source: http://www.soundmoneyproject.org/?p=8212