Wednesday, September 9, 2009

Gold eclipses $1,000

NEW YORK — 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 in the economy as a whole?

Here are some questions and answers about the high price of gold.

Was Tuesday's high price a record for gold?

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.

Why are gold prices rising?

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 the dollar 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.

Why is the dollar weakening?

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.

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