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The Midas Factor
Subject Gold Prices
Topic Money and the Financial System
Key Words Economic Recovery, Balance of Payments
News Story

With the threat of war with Iraq, the plunge in stock prices, the anemic economic recovery and the fall in the value of the dollar, many investors have been turning to gold as an investment. Gold prices recently hit a 6-year high, closing at $368.30 an ounce. Over the past 20 years, gold as an investment has performed poorly in comparison with stocks. Since 1980, the Standard & Poor's index of 500 stocks has increased about 700 percent, while gold has decreased 27.9 percent. However, whenever the economy has been best with problems, gold prices have risen.

Over the past few years, individual sales have accounted for 15 percent of gold transactions, with industrial and commercial users responsible for the bulk of trades. With the increase in economic uncertainty, gold prices and individual interest in this commodity has risen. Sales at some firms that deal directly with individual investors have actually doubled during the past year.

Even with the upswing in gold prices, many investors avoid gold because the small size of the gold market and its volatility make for an unacceptable level of risk. Daily fluctuations in the price of gold of 5 to 15 percent are fairly common. Individuals who want to invest in gold can buy gold coins or bars from retail dealers. Other options are to purchase shares in gold or precious metal mutual funds or shares of gold mining companies.

Whether the gold price rally will continue past the war with Iraq is uncertain. Some believe that when the war ends, people will avoid gold and its price will return to last year's level. Others argue that the U.S. balance of payments difficulties as well as the lackluster recovery will keep gold prices rising.

(Updated April 3, 2003)

Questions
1.

One of the functions of money is to be a store of value. Does gold provide a store of value? Is it a money?

2. What are the other functions of money? Can gold serve these functions?
3. What determines the price of gold? Why does the price of gold rise when there is a threat of war or economic disaster?
4. What are some of the ways that an individual can purchase gold?
Source Anitha Reddy, "Investors on a Gold Rush," The Washington Post, February 1, 2003.

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