Page last updated at 15:20 GMT, Tuesday, 13 October 2009 16:20 UK

Why the price of gold is rising

Gold bars
Gold prices have been rising for eight years

The price of gold continues to set new records.

The precious metal reached a record high of more than $1,065 an ounce on Tuesday morning.

WHY HAVE GOLD PRICES REACHED SUCH HIGHS?

There are several factors at play which are leading to demand for gold rising, pushing up the price:

Weakness of the dollar: The greenback is commonly seen as the World's reserve currency. Low interest rates and the US government's massive economic support package have weakened the dollar.

Those who would typically have invested in that currency are looking for other places to put their money where it will, they hope, gain value.

Speculation: A lot of the investment into gold is coming from institutions such as hedge funds - whose money needs to go somewhere.

When banks are offering very low rates of interest on savings - and money can be borrowed extremely cheaply - gold becomes attractive, observers say.

Inflation risk: Gold is seen as a hedge against inflation. Right now, inflation is pretty low, but mounting worries about potential inflation in 2010 may be enticing more investors to the precious metal.

Psychological: Gold has a "primeval" quality argues Adrian Ash of UK online gold exchange, BullionVault.com (which makes its money when customers buy and sell gold).

He says that while it is essentially a "lump of metal with little purpose", gold tends to hold its value over the long term and is not anchored to the value of cash.

This means that people are drawn to it in uncertain times, Mr Ash adds, though he cautions the price can be volatile.

Seasonal: In Western cultures, individuals buying into gold as an investment remains relatively rare. It is not the kind of advice you are likely to get from a financial adviser, for example.

However, in countries such as China and India, buying gold as in investment is more common. And at this time of year, in the run-up to the Diwali festival, there is a seasonal increase in gold purchases because the metal is traditionally given as a gift.

Indian farmers are also big gold customers at this time of year - seeing it as a way of keep their profits safe after harvest - free from threat of currency fluctuations.

DOES THE PRICE OF GOLD REALLY MATTER?

The reality for most people is that their main contact with Gold is when Spandau Ballet gets played on the radio.

Arguably its biggest role is as a sentiment barometer. A high gold price is an indicator that all is not well with the global economy.

It could be bad news if you are looking for an engagement ring or another piece of jewellery. Higher prices are likely to be passed on to shoppers.

On the other hand, it could be good news if you have gold that you no longer want and could do with making some money.

The rising price has seen an explosion in "scrap gold dealing" - where High Street shops and postal companies will offer to turn the gold into cash.

We should not get too carried away, however. When inflation is taken into account, gold is half the value it reached in 1980 in real terms, when it peaked at the equivalent of $2,350.



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