September 29, 2010

Gold vaults to new high

On September 29th the front page article of The Wall Street Journal is on how during the last week the price of gold climbed to over $1300 an ounce.

The weakness of currency is cited as the reason for the increased demand in gold. That it “minimizes the opportunity cost of holding hard assets that pay no interest.” This weakening or fear of weakening of the currency has made gold more preferred to other investments. Basically what this is saying is that right now all other investments are substitutes for investing in gold and the weakness of the dollar has made the price of these investments go up. If we look at the supply and demand model, if the price of substitutes increase that would cause a shift right in the demand curve which is what we have seen with gold.

The article does correctly assert that the increase in gold prices are due to the increased demand for gold. Some coin wholesalers are even increasing their prices over the market rate due to the high demand. The article also talks about how the increased demand is causing shortages of physical gold supplies; one example is that the US mint has sold out of the pure gold Buffalo coins. The article does fail to draw a correlation between the increases in the gold price the shortage of gold supplies. Assuming that we hold the current demand of gold where it is. The Supply and demand model shows us that the shortage of gold would shift the supply curve to the left, thus increasing the price of gold. Some of the increase in the price of gold has to be attributed to the lack of supply of physical gold.

The article also talks about how gold warehousing companies are seeing an increased in demand for storage of the gold people are buying. This correlation would suggest that gold warehousing and gold itself are complementary goods.

WSJ link
Gold Vaults to New High


Patrick Buesing said...
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Larry Eubanks said...

If there is a shortage, we won't expect this to end due to a shift up and to the left in supply, i.e., a decrease in supply. Given demand, price would be bid up.