MM Money

Should You Be Buying Gold?

Excerpt: Without trying to make a specific price forecast, it seems fairly clear that the price of gold in U.S. dollars will continue to rise until the dollar begins to rebound against the euro. But does it follow that you should be buying gold?

The price of gold remains above $450, the highest level in 16 years. And many market watchers expect the price to go higher still in 2005.

The chief reason for the recent run on gold is the decline of the dollar. Since late 2002, the euro has risen from $1 to $1.30 in value -- and the U.S. dollar has fallen correspondingly against the euro and some other major currencies.

Because of the dollar's reduced buying power, the price of gold over the same period has risen about 35 percent in U.S. dollars. By contrast, gold has gained less than 5 percent in euros.

There are, however, some forces besides currency exchange rates pushing up the price. Gold production doesn't change very fast. So unless central banks start dumping gold, demand determines the price trend.

Jewelry demand is the largest factor, and it has been growing faster than 5 percent a year. Analysts say that rate could speed up as China becomes wealthier, since the Chinese have historically been partial to gold jewelry.

Investment demand, though much smaller than jewelry demand, has been growing nearly 10 percent a year.

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