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“Gold Slaps Skeptics”
by America's Markets   
December 2nd, 2014

Gold futures soared 3.6% Monday, buoyed by a rebound in oil prices, a drop in the value of the U.S. dollar on international currency markets and a downgrade of Japan’s government debt.


A gold bar. (Photo credit: Lauren Gustus, Gannett)

Gold for February delivery rose $42.60, to $1,218.10 an ounce. The yellow metal has been in a protracted bear market since 2011, when it hit $1,895 an ounce.

Gold is prized as an alternative currency, because gold has been used as a currency for thousands of years. When the value of the dollar drops on the currency markets, gold rises, and vice-versa. The euro rebounded from its long slide today, rising to $1.2474, a 0.74% gain.

Gold also rises when people fear inflation, and oil’s 4.9% gain today could push inflation higher if it continues to rise. Energy is a major component of the government’s consumer price index.

Many investors may have been betting that Switzerland would vote down a law requiring the country to increase its gold reserves — which it did. Gold prices fell early Monday on the news, but snapped back, possibly the result of pessimists closing out their positions. In the futures markets, you have to buy gold to close out a bet that prices will fall — a process called short covering.

Finally, gold can rise on worries of global disruption and unrest. When Moody’s downgraded Japan’s government debt, it created uncertainty about Japan’s massive debt, currently about 200% of its gross domestic product.

Gold is an investment that rises on investors’ fears, whether or not they’re well-founded. Gold rallied in 2010 2011 largely on fears that the Federal Reserve’s bond-buying program would create inflation. It didn’t, and the gold rally stalled.

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