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Buying metal increasing trend in current economy

Gold prices continue to rise
Buying metal increasing trend in current economy

by: Frank Pellegrino Issue date: 11/10/08 article courtesy of: Univ of Wisconsin http://media.www.spectatornews.com

Gold has been known as a symbol for wealth and status ever since the precious metal was first discovered.

From jewelry to sculpture, gold has always been used for a variety of artistic and monetary purposes.

Likewise, gold is also used for more practical situations like dentistry or electronics because of gold's resistance to oxidative corrosion.

Due to the necessity of gold for all of these different functions, and the current state of the economy, gold continues to rise in price and hover around $1,000 an ounce. According to Rebecca Le May, journalist for The Daily Telegraph, who recently reported on the gold price increase, gold was as low as $601.90 per ounce in 2007.

As prices continue to rise, more and more Americans are following the trend, and are considering purchasing gold with the hopes its value will increase.

The rising gold prices in the United States are a continuing trend that may be around for a while.

What has caused the increase?

There are a few theories as to why gold has increased so much in value recently, depending on which expert you listen to. Many experts also agree that the jump in value could be the result of a few different reasons combined together.

Associate professor of accounting and finance at UW-Eau Claire, Rajarshi Aroskar, said it is because the markets are in turmoil right now.

"We had an increase in credit for a long period of time," Aroskar said, "and there is a credit crunch (a sudden increase in the cost of obtaining a loan from the banks) right now."

Aroskar explained that when eliminating credit from the market, it depresses all of the prices. Therefore, the investments held in stocks and other things would all decrease in value.

"Because of that, the only safe-haven that remains is gold," said Aroskar, adding that the large demand for gold is causing the price to continue to increase.

Junior political science major Isaac Orr agreed that the result of the increase is due to the current state of the economy.

"A lot of it is just because the dollar has been so poor recently," Orr said. "In comparison (to the dollar), people like to have something that is solid and valuable regardless."

Senior Robyn Fennig, president of the Student Economics Association, said it has to do with Americans' mental states as well.

"It's not only due to the current state of the economy, but also because of people's attitudes toward markets," Fennig said.

Orr pointed out that gold has taken some of its biggest hits in the last couple of days, going from being above $800 per ounce to dipping below $700. She added the increase is also a function of people's hesitancy, or desire to get into the market.

"I just think it really comes down to the fact that everyone is a little unsure about things right now," Fennig said.

Le May made a similar remark in her report and said gold offers good protection against exchange rate fluctuations, particularly the U.S. dollar.

Should people buy into this?

One way to decide whether you should buy into something is by looking at the past.

Aroskar said that this type of situation has happened several times before in history, but most of it occurred in the 1800s. He added that people who bought into the gold value increase and purchased gold while it is still on the rise would surely see economic benefit.

"I wouldn't buy into gold right now from a short-term perspective," Aroskar said. "From a long-term perspective I would, yes, but from the short-term I wouldn't because the prices have gone up so much that there is no point in investing."

Orr disagrees that there is no short-term benefit.

"I plan on buying some gold; I was hoping gold would dip back below $700 (per ounce), but I don't see the state of the economy changing anytime soon," he said.

Fennig thinks it's important that people not only invest in gold, but in other economical assets as well. She added that if all of the markets crash, people would need multiple other assets as a back up plan.

Orr thinks the increase in value will definitely continue for time to come, and Fennig agreed.

"It will increase until the economy stabilizes a little bit more," Fennig said.

Aroskar somewhat refuted that because he thinks there will be some type of drop in the near future. However, he also said that from a long-term perspective the value of gold will continue to increase forever.

Le May said the increase will continue because if the U.S. dollar is going to continue to fall and inflation is expected to rise, the result will be an uncertain outlook for equities.


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