The Gold Market and Modern Behavior

The spot price of gold meeting the above criteria is then set by the amount of demand that exists on the market for the metal as well as the supply available. The cost is referred to as a spot price because the value changes daily as the markets move the price up and down in value.

History

Official pricing of pure gold began in 1919 in London, England. Using the troy weight methodology, an ounce of 24 karat gold was valued and changed by market demand daily. For a long time afterwards, gold was sold in bullion or derivative form, with values based on the metal itself or orders of gold to be provided to the market in the near future.

Like other governments of the time, the U.S. based its currency on the value of gold to back up the U.S. dollar. This continued until the mid-1930s when the U.S. government forced the value of the dollar tobe set at $35 to a troy ounce of gold. However, less than 30 years later, the U.S. was struggling to support this price level with its own economy. Finally, the U.S. and European financial community decided to de-link the U.S. dollar from gold, allowing the metal to float again on the market demand. It helped significantly that the U.S. was also the major restoration support of Europe after World War II at the time.

The gold price floundered at the end of the 1960s, causing a significant scare for governments that used the metal to settle international debts. It was decided then that the market value of gold had to be separated from the value governments gave it, to avoid speculators from destabilizing government finance. By 1975, gold pricing was completely separated from government valuation.

Modern Behavior

As the U.S. economy began to burp and falter in the late 2000s, the gold price driven by speculation has skyrocketed. In 2008 the gold spot price was driven up to ranges hovering between $865 to $1023 per ounce. In 2012, four years later, the gold spot price has broken the $1800 barrier multiple times. It is expected that the gold spot price will break $2,000 per ounce either in 2012 or 2013. That said, there is also so much demand for gold, it is now officially considered another market bubble. Many skeptics expect the gold price to suddenly collapse quickly as previous market bubbles have done in the 2000s.

Future Fears

Part of what continues to drive the gold spot price higher involves market weakness fears as well as the more extreme panic that modern economies are ready to fail. The paranoid buyer assumes the U.S. and world economies will soon collapse under their own debt weight. When this occurs, the only buying power that will exist will be in the hands of those who own gold. Because the metal has no connection to the U.S. dollar, it provides a perfect alternative to dollar-based investments, especially with the recent rise in spot price.

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