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Help: Questions about the economy, gold prices, stock market, inflation, etc.

Josie

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I'm kinda stupid about things like this. I don't have a clue about the stock market or inflation or deflation....I guess I just need someone to explain it in detail to me so I'll understand.

So....my first question....I keep hearing that gold prices are going up and up.....what causes that?
 

phattonez

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Lots of things could cause that. In the long run, the only causes would be devaluation of the dollar and/or loss of supply of gold (since the latter doesn't happen much, it's almost always the cause of devaluation in the long run). This is assuming that demand for gold is relatively constant over the long term.

In the short run, fears of inflation (speculation) could cause a rise in gold prices, etc., but it will return to its true value in the long run.
 

Missed AB

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I'm kinda stupid about things like this. I don't have a clue about the stock market or inflation or deflation....I guess I just need someone to explain it in detail to me so I'll understand.

So....my first question....I keep hearing that gold prices are going up and up.....what causes that?
A not so simple question to answer, and many will have their own opinions on this. So I would suggest you add their opinion to the opinion of this post, as each are true.

~It is estimated that 300 dollars of the current value of gold as traded is due to expanded buying of gold by ETF's, such as GLD. ~There is also a portion of gold price which reflects the buying of gold by central banks.
~Some gold is used in microprocessors, this is the primary industrial use for gold, and that demand is also a market driver for price.
~Many people are buying gold because of fears of inflation, and these market forces currently are pushing up the price of gold.
~Speculation is also involved in metal prices as "bets" are made where the future price will be.
~Some of the price of gold is due to what is called a "short squeeze", where people who feel gold is in a bubble, have shorted the stock GLD, and as the price continues to raise, they are forced to buy gold to erase their short position.

Together these forces, and many others that I have not mentioned all combine to create the current price of gold.

You are not stupid in your question. But it is important to know that any game where there are just winners, ie gold will always go up, is a flawed logic and will be a costly future lesson if that investment theory is followed.
 

Lord Tammerlain

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Gold is a store of wealth, and is a universal currency, outside of its industrial or commerical uses.

When the threat of inflation arises, people look to gold as a means of protecting their wealth from being debased. Gold in an inflationary enironment will generally buy as much today as it will 10 years from now, while $1000 dollars today would buy far less in 10 years

It is also transportable when compared to most hard assets, so if things go south from a political standpoint, a person can gather up his/her gold and head for greener pastures while still being able to take their wealth with them
 

rathi

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Inflation is when money loses its value. The number of the dollar bill stays the same, but the amount of real good you can purchase with it goes down. For example, in 1950 you could 10 bottle of coke for $1, in 2010 1$ only gets you one coke. Deflation is the opposite, where money goes up in value. For a currency like the dollar, the amount of inflation is (more or less) determined by the government.

Stocks are where you buy partial ownership in a company. In general , the value of the stock goes up or down depending on how well the company does financially. In general, people buy stock in a company when the think it is going to grow and sell stock when they think it will crash.

Gold is a commodity. The price is based on the demand (how much gold people want to buy) and supply (how much physical gold actually exists). The price of gold has been rising because many more people have decided to buy gold recently, you have probably noticed the large amount of ads from gold dealers on fox.
 

Josie

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I guess I still don't understand "devaluing the dollar". How does that happen? When the dollar is devalued all the prices for everything goes up?
 

rathi

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I guess I still don't understand "devaluing the dollar". How does that happen? When the dollar is devalued all the prices for everything goes up?
Yes.The coke that costs 1 dollar today might cost $1.02 next year and $1.05 the after that if there is inflation. The less the dollar is worth, the less tangible stuff you can buy at a store for a dollar
 
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washunut

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I guess I still don't understand "devaluing the dollar". How does that happen? When the dollar is devalued all the prices for everything goes up?
For the most part when people talk about devaluing the dollar they are mostly talking about the value of the dollar versus other major currencies. For example it now costs about $1.40 to buy 1 Euro. A few months ago it was $1.20. The dollar is at a decades low against the Yen. Currently it costs about 80 Yen to buy a dollar etc.

The biggest impact then is when we export products or import products. Lets take the Yen and we are selling oranges. We sell an orange for $1.00. Last month in this example with the yen 90 to a dollar it would cost someone in Japan 90 Yen to buy an orange. Today it costs 80 yen. So the cost to Japanese consumers go down on stuff they import (we export). Conversely if we buy a Toyota from Japan and it costs 200,000 Yen a month ago that would be 22,000 dollars today with yen at 80:1 the cost would be 25,000.

This devaluation also impacts commodities like oil. Oil is paid for in dollars. So as the dollar is devalued the cost in dollars looks like it is going up but in may not be going up in Euros. Same is true of the gold that was mentioned earlier. If the dollar goes from 1.20 to 1.40 versus the Euro that is about 16% devaluation. So gold that was trading at 1,200 dollars or 1,000 Euros a move to 1,400 dollars means in still costs 1,000 Euros.
 

Harry Guerrilla

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I guess I still don't understand "devaluing the dollar". How does that happen? When the dollar is devalued all the prices for everything goes up?
Imagine if there is a room of 10 people, that are trapped, but only enough food to feed 1 person.
That one unit of food is going to be pretty valuable.

Now imagine the opposite, there is a room of 10 trapped people, but there is enough food to feed everyone indefinitely.
The value of 1 unit of food is low.

It's still the same food but the quantity changes the value of it.

Basically, the more dollars that are added to the economy, the less each dollar is worth.
That is inflation.

There are other ways that this can happen, but this is the basic explanation.
If you'd like me to go further I can. :)
 
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Missed AB

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Gold is a store of wealth, and is a universal currency, outside of its industrial or commerical uses.

When the threat of inflation arises, people look to gold as a means of protecting their wealth from being debased. Gold in an inflationary enironment will generally buy as much today as it will 10 years from now, while $1000 dollars today would buy far less in 10 years

It is also transportable when compared to most hard assets, so if things go south from a political standpoint, a person can gather up his/her gold and head for greener pastures while still being able to take their wealth with them
It is also a very good way to transfer wealth. There is no proof that someone has 1000 gold coins buried in the basement vault under the hard wood floor in the house. Even if gold deflates in value, the storage would still be better than the transfer according to federal law. The federal "death taxes" which in the "health care bill" have been altered, now stand at 50% taxation starting at 1 million dollars in wealth, plus state death taxes... not that I would attempt to avoid taxes, but gold is an example of a way to avoid such taxations.
 

Missed AB

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For the most part when people talk about devaluing the dollar they are mostly talking about the value of the dollar versus other major currencies. For example it now costs about $1.40 to buy 1 Euro. A few months ago it was $1.20. The dollar is at a decades low against the Yen. Currently it costs about 80 Yen to buy a dollar etc.

The biggest impact then is when we export products or import products. Lets take the Yen and we are selling oranges. We sell an orange for $1.00. Last month in this example with the yen 90 to a dollar it would cost someone in Japan 90 Yen to buy an orange. Today it costs 80 yen. So the cost to Japanese consumers go down on stuff they import (we export). Conversely if we buy a Toyota from Japan and it costs 200,000 Yen a month ago that would be 22,000 dollars today with yen at 80:1 the cost would be 25,000.

This devaluation also impacts commodities like oil. Oil is paid for in dollars. So as the dollar is devalued the cost in dollars looks like it is going up but in may not be going up in Euros. Same is true of the gold that was mentioned earlier. If the dollar goes from 1.20 to 1.40 versus the Euro that is about 16% devaluation. So gold that was trading at 1,200 dollars or 1,000 Euros a move to 1,400 dollars means in still costs 1,000 Euros.
To expand on this point, the federal government cannot pick and choose it's currencie's value. This is done mainly by traders on FOREX. Traders/investors consider risk to valuation when making the trades. Governmnets can do things to alter the preceived value by doing thigs such as QE (printing money). The theory many believe is that by decreasing the value of the home currency when compared to other currencies it will stimulate the home countries economy by increasing exports and decreasing imports because of the above quoted material.
 

oldreliable67

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MissedAB said:
not that I would attempt to avoid taxes,
Avoiding taxes is perfectly legal. Evading taxes is not.
 

MaggieD

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I'm kinda stupid about things like this. I don't have a clue about the stock market or inflation or deflation....I guess I just need someone to explain it in detail to me so I'll understand.

So....my first question....I keep hearing that gold prices are going up and up.....what causes that?
Traditional reasons for the rising price of gold are out the window right now. The world is in a gold frenzie -- led by China, surprisingly enough. The Chinese government is pushing the purchase of gold to its citizens....even opening "gold stores" all over their country operated BY the government. Imagine the brand new demand!!

The Chinese government is losing faith in the U.S. dollar, hedging its bets, if you will. And gold is part of that hedge. Article from 9/28/10:

The U.S. dollar is “one step nearer” to a crisis as debt levels in the world’s largest economy increase, said Yu Yongding, a former adviser to China’s central bank.

Any appreciation of the dollar is “really temporary” and a devaluation of the currency is inevitable as U.S. debt rises, Yu said in a speech in Singapore today.

U.S. Treasuries fail to provide safety or liquidity in managing China’s $2.45 trillion foreign-exchange reserves, Yu said in an e-mail in August. To help cool demand for the securities, China needs to curb the growth of its foreign reserves by intervening less in the currency market, he said.

China should reduce its holdings of U.S.-dollar assets to diversify risks of “sharp depreciation,” Yu said in July. The nation should convert some holdings in U.S. dollars into assets denominated in other currencies, commodities and direct investments overseas, he wrote in a commentary in the China Securities Journal.
Lots of "snips" from this article. Here's the link: Former China Adviser: US Dollar Is 'One Step Nearer' to Crisis
 

imagep

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It's also out of control due to all the companies hawking gold on conservative websites, magazines, and Fox news. No tellings how many people have purchased gold, likely millions of ounces, that would have otherwise never considered doing so. Eventually, when our economy starts to improve and the hysteria calms, those companies will disapear.

I suspect that if the new congress is able to demonstrate any significant spending cuts (unlikely), or when unemployment starts dropping significantly, or if any other event happens that improves consumer confidence, that the price of gold will drop like a rock.

The price of gold is currently a bubble, it may very well go to over $2,000 an ounce, but it will eventually fall back to historically normal levels, probably in the $350-$600/oz range. History is always the best predictor of the future. There may be some more profit to be made, but people who are heavily invested in gold just need to make sure that they get out long before the bubble bursts. Personally, I sold what little I had I sold at $1,200/oz. Kind of regret that now, but I'd rather sell before the peak than to be stuck after the collapse.
 
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phattonez

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I guess I still don't understand "devaluing the dollar". How does that happen? When the dollar is devalued all the prices for everything goes up?
Not necessarily. Say that the supply of money doubles, but production quadruples. Prices would probably fall across the board, but the important point is that prices are higher than they would have been without that infusion of new money.
 

Missed AB

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if any other event happens that improves consumer confidence, that the price of gold will drop like a rock.
The event will be when gold stops giving double digit gains annually. When the train runs out of steam, stocks will be a better option for continued growth since bond yields of 3% will not be drawing the gold crowd.

If someone's gold investment rationale was to hedge inflation, then TIPS are a much better option. It is speculation and capital growth that is fueling the current gold market. Stocks are the only logical next step for someone seeking capital growth. This means the time to buy stocks is now, not gold.
 

Josie

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Imagine if there is a room of 10 people, that are trapped, but only enough food to feed 1 person.
That one unit of food is going to be pretty valuable.

Now imagine the opposite, there is a room of 10 trapped people, but there is enough food to feed everyone indefinitely.
The value of 1 unit of food is low.

It's still the same food but the quantity changes the value of it.

Basically, the more dollars that are added to the economy, the less each dollar is worth.
That is inflation.

There are other ways that this can happen, but this is the basic explanation.
If you'd like me to go further I can. :)
Okay. THIS is making sense.

What would be the point of devaluing the dollar? Is it done deliberately or is it just something that happens on its own?
 

Harry Guerrilla

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Okay. THIS is making sense.

What would be the point of devaluing the dollar? Is it done deliberately or is it just something that happens on its own?
It can be both deliberate and as a non deliberate effect of perception.

In the deliberate sense, the U.S. government may want to do it because paying old debts with inflated dollars make sense.
As an example, you borrow $100,000 to buy a house, you have locked in the price with that, as inflation continues onward so does the cost of living and average wages.

The last part is most important, as long as average wages increase, inflation can be good.

In the non deliberate sense, if people internationally don't want the dollar, they would sell it, causing the price to drop.
Like a share of stock, enough people selling will cause the price to go down.
 
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