Gold prices rose above $1,000 an ounce Tuesday for the first time in seven months, mostly because of a weak dollar that's driving people to other investments they perceive as safe.
How is the increase in price — which has accelerated in recent weeks — likely to affect jewelry shoppers? What about people who invest in gold, or the economy as a whole?
Here are some questions and answers about the high price of gold.
Q: Was Tuesday's high price a record for gold?
A: It was high, but not a record.
The price of gold climbed as high as $1,009.70 an ounce in the morning before giving up some of its gains later in the day. In afternoon trading, prices settled at around $1,000 an ounce.
Tuesday's price was the highest of the year and the first time the price rose above $1,000 since February. But the record came on March 17, 2008, when gold prices hit $1,033.90.
Tuesday's price was even further from the record high when accounting for inflation. In 1980, gold prices hit $850 an ounce — equivalent to more than $2,200 in today's dollars.
Q: Why are gold prices rising?
A: Analysts say the price of gold has been rising predominantly because of the weakening value of the U.S. dollar. Typically gold prices move in the opposite direction of the dollar, so as it weakens, gold prices rise.
The reason: When the value of the dollar, often considered the world's reserve currency, is falling, investors often turn to gold as a relatively safe alternative place to put their money.
"When you have currencies weakening and there's no currency of choice (among traders), you move to gold," said Carlos Sanchez, an analyst with CPM Group in New York.
And it's not just a weak dollar that can have this effect; investors' worries about further weakening can boost gold prices even higher.
The dollar continued to weaken against other major currencies Tuesday, falling by about 1 percent against the euro and the British pound.
Q: Why is the dollar weakening?
A: It's largely because of concerns related to the massive stimulus spending by the U.S. government to spur the slumping economy, which some worry could eventually lead to inflation. As inflation grows, the value of the dollar could shrink.
That continued spending and potential for inflation has also led some major investors in U.S. bonds, such as China, to say they would curtail their purchases of such dollar-denominated debt. Weakening demand for these bonds would likely push the value of the dollar lower.
Q: Is the price of gold going to continue rising?
A: Analysts are still mixed about where gold might head.
James DiGeorgia, publisher of the newsletter Gold and Energy Advisor, said prices could reach as high as $1,200 an ounce by the end of the year. DiGeorgia said the continued weakening of the dollar and potential for inflation will remain, pushing gold even higher.
However, James Steel, an analyst with
HSBC, noted that the last few times gold has neared or eclipsed the $1,000 barrier, it quickly retreated.
Q: Could the price of gold affect any potential economic recovery?
A: Jon Nadler, a senior analyst at Kitco Metals Inc. in Montreal, said that is unlikely. Because gold is used more in luxury goods and not a necessity like other commodities such as oil, it is unlikely to propel or drag the economy as it tries to shake the ongoing
recession.
Q: What do rising gold prices mean for customers who buy jewelry and other products made from gold?
A: Quite simply, it means prices are likely to continue to rise. Tuesday's rise might not cause an increase in prices overnight, but as prices continue to move higher, that added cost is passed along to shoppers who buy things like gold rings and necklaces.
Q: Has the recent rise in gold prices affected business already?
A: Absolutely.
Ernest Perry, whose business Perry's at SouthPark in Charlotte, N.C., specializes in antique and estate jewelry, said retail sales fell 8 percent during his fiscal year ending Aug. 31. Perry said he was surprised business wasn't even lower in the past year because of the rising prices.
As prices have gone up for gold jewelry, Perry said customers are opting for jewelry made with silver or other metals instead.
Kitco's Nadler said India, the world's largest market for gold, has seen its imports fall by two-thirds so far in 2009. The steep decline in imports in India is "precisely because of price sensitivity," Nadler said.
Of course, given the state of the economy, people might have been less inclined to buy gold jewelry even if the price of the metal were far lower.
"It's a luxury purchase, and times aren't exactly luxurious," Nadler said.
