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Investment Demand for Gold

The demand for jewellery as an investment comes in large part from reputation. While there are no direct factors that link gold prices to inflation, the US dollar, or economic and political concerns, investors’ expectations – as long as enough people believe – are powerful enough to create a relationship.

Bad news about the economy in the US and Europe sent more and more investors to gold as a perceived safe haven. The more investors who bought in, the higher prices rose justifying their purchase and creating a self-fulfilling prophesy. The fundamental problem is that this is the description of a market bubble. The fear is that the market created a pyramid scheme effect whereby the value and use of gold had barely increased but the speculative force caused prices to rise to a point that may not be sustainable in the long run.

Even the types of events that might usually lift prices can sometimes have the opposite effect because of real world supply pressure. The recent fall in prices is partly attributed to the idea that the struggling Cypress might sell their gold reserves to raise money. This comes after part of the previous rise in gold prices having been a result of investors rushing to gold to protect their wealth against the economic troubles in Europe.