For thousands of years, mankind has been charmed by gold, and the desire to own it has led to fervent gold rushes, dastardly deeds and greed-driven wars. Today, the precious metal is sought after for both jewelry and investment purposes, as well its industrial applications in certain electronic and medical devices.

TUTORIAL: Commodities: Gold

The economic downfall of the last several years has helped ignite an increased interest in gold prospecting and investing. Gold prices, which have fluctuated within a $500 range thus far in 2011, can be affected by a number of factors, including:

  • Central bank gold reserves. As central banks vary monetary reserves – away from paper currencies and into gold – the price of gold increases.

  • Gold production. China, South Africa, the United States, Australia, the Russian Federation and Peru are all major players in worldwide gold mining. Supply and demand affects the price of gold.

  • Impact of emerging markets. The demand for gold is expected to increase as economies develop and salaries increase in emerging markets.

  • Political and economic uncertainty. In times of economic uncertainty, more people look towards gold as a "safe haven" for their investments.

  • Value of the U.S. dollar. The price of gold is typically inversely related to the value of the U.S. dollar. A stronger dollar tends to keep the price of gold lower; a weaker dollar tends to drive the price of gold higher.

  • Worldwide jewelry and industrial demand. Seventy-eight percent of newly mined or recycled gold is used in the manufacturing of jewelry. Consumer demand is increasing in emerging markets such as India and China, where increased salaries equate to increased disposable incomes.

These issues helped push gold to a high of over $1,900 per ounce during September 2011, with many economists speculating that gold can and will go even higher. Even though prices have dropped off their September highs, gold continues to be a safe haven for investors who are worried about the economic climate in the U.S. and abroad, including the current EU debt crisis. (For additional reading, check out: Who Holds The Largest Gold Reserves?)

Is Silver the New Gold?
Silver has industrial applications and is an increasingly popular investment vehicle. Silver prices, like gold, have been experiencing price swings, and moved to an all-time high of $49.51 per ounce in late April 2011. After a rapid climb to nearly $50 per ounce, trading was tempered by a move at the Chicago Mercantile Exchange. Concerned that silver was becoming a potential haven for speculators and in an attempt to reduce volatility, CME Group Inc.'s COMEX unit raised margin requirements on silver trading several times; these moves quickly slowed silver's climb. Since the April highs, silver has been able to piggyback on gold's success much of this year, having spent several months in the $40 - $50 range while gold reached its highs in September. (For additional reading, check out: Is Silver The New Gold? )

Eurozone Pushed Gold and Silver Higher
Earlier this year, gold prices jumped in response to rising oil prices, political unrest and the threat of violence in the Middle East and North Africa (MENA) region. As the year progressed, concerns shifted to the European debt situation. On Nov. 7, 2011, gold and silver futures jumped in response to European debt concerns. Following speculation the prior weekend at the G20 summit regarding the fate of German gold, Germany rejected proposals by France, Britain and the United States to allow its gold reserves to be used as collateral for the eurozone bailout fund. Philipp Roesler, Germany's economy minister, stated that "German gold reserves must remain untouchable."

The Bottom Line
As investors continue to buy gold as a safe haven amidst economic turmoil, some analysts believe prices might rise to $2,000 an ounce by the end of this year, and may go as high as $2,300 by the end of 2012. The safe haven status, coupled with increased demand from emerging markets, and the fact that, while gold prices have risen dramatically this year, its price has not strayed far from its statistical mean, could point towards gold breaking out above this year's highs. Investors have had a wild ride in gold and silver this year, and many analysts expect the volatility to continue. Gold is still far from its January, 1980 inflation-adjusted high of $2,300 per ounce, indicating that gold very likely will continue to climb higher. (For additional reading, check out: How Can I Invest In Gold? )

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