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Investors are still reeling from the recent price drop in the value of gold. Looking at both long and short term ramifications, the cause preceding the drop seems to have two main forces behind it.
Whatever factors were at work, the drop marked the largest single one-day downward swing for gold since the year 1983. The drop caused many to wonder if the safe investment gold has been viewed as for nigh the past decade was about become a thing of the past.
What the Drop Means for Current Investors
For those with money in gold, there is mostly good news tinged with some bad. Even the bad carries with it some mitigating factors, which means investors should be back to seeing the value rise before to long.
During the drop, gold reached its lowest price since February of 2011. The price plummeted $140.30 an ounce on Monday, April 15th, which represented a decrease in value of nine percent. That summed up to a total drop of 13 percent over the last two days of trading at that point. The drop was mainly precipitated on Friday, April 12th when the United States government released a report detailing a recent drop in inflation. This follows the well-established trend that consumers typically buy gold when they are afraid of rising prices, but sell when the inflation starts to retreat.
That real event was then coupled with a rumored selloff by Cyprus of some of the gold from its reserves. The fear that other European countries may also dump some of the metal on the open market, thus driving prices down, also may have spooked others in to selling, leading to a mini-panic of sorts. Once the downward spiral was initiated, investors began to dump out of fear that the bubble might be bursting.
What is the Short-Term Future for Gold
However, many experts point to a coming surge as new investors, and even some already bought in to the market, begin to snap up more for their portfolio before the value of gold shoots back up again. It is hard to argue against an investment that, while it has not gone north of $1,792 an ounce in value since October 24th of last year, has still marked continual growth over the last decade. In that ten years, the value of gold has gone from $330 an ounce to over $1900 as recently as 2011.
Long-term, it could simply be argued that the value of gold had been trending upward for too long, and merely need a correction. Even with its dips recently, gold has gone up every year for the year for the last twelve years. Some experts see this drop as analogous to a similar drop in 1970 that then resulted in a huge upswing. If that trend holds, those experts see the value of gold as getting up for $3400 an ounce rather easily in the coming years.
Should you be Buying?
As with any investment opportunity, there is an amount of risk and those wishing to invest should do their own homework, but the market does seem primed to start heading upward again. The tumultuous economic situation worldwide may continue to play havoc with the value of gold, but stabilization and the growth are on the horizon.
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Give consumers alternatives they can feel good about buying – devices sourced and assembled in a fair, safe and green manner. Then let the market decide whether it values worker rights over cheap devices. The manufacturer that takes the gamble could own a niche in a market rife with conscientious young customers.
Well, it sounds like a simple solution, anyway.
The more I researched the issue and talked to supply chain and fair-trade experts, the more complicated things became.
For starters, no such designation exists for electronics today and it would require buy-in from the industry to establish one, said Heather Franzese, director of new business at Fair Trade USA in Oakland.
Businesses have to want to stamp their products with such declarations to differentiate them in the marketplace. Unlike segments of the food and apparel sectors, however, tech firms have displayed little interest in doing so. Typically it takes a critical mass of consumer and media pressure before industries move in this direction – and it seems we’re not yet there.
But perhaps the thorniest problem comes in determining what fair trade means. Ultimately the standards are subjective and somewhat arbitrary. How do you determine a fair wage in a poor nation with few other employment options? How many hours are too many hours? What qualifies as safe enough? Does “underage” mean 18, 17 or 16
A particular challenge for electronics is determining what parts of the industry’s long supply chain falls under those standards. Depending on how you count, there are hundreds or thousands of components in the average smart phone, using materials sourced from around the globe.
Should we hold companies responsible for minerals that might have changed hands five times before arriving at a smelting facility? Can we realistically audit the origins of all those materials?
The answer may simply be no.
“Everyone would like to see a phone that comes from places where everyone is treated fairly, but in practice, I think the supply chain is so global and so complex that it’s virtually impossible to confirm 100 percent,” said Rick Pierson, an analyst at IHS Global Insight.
Take the tantalum capacitor, a component of circuits that holds an electric charge. There are more than 450 in an iPhone, according to IHS.
Some estimates say 20 percent of the world’s tantalum comes from the Congo, where its sale has financed militias that have committed atrocities over the last 15 years, including mass murder, rape and mutilation, according to various reports. These rebels have forced miners to dig up minerals for a pittance in conditions that make Chinese factories look like Google’s corporate campus.
Major volumes of other minerals critical for electronics – like tin, tungsten and gold – are produced under similar conditions throughout Central Africa.
In 2010, Steve Jobs addressed the complexity of tracking these materials in an e-mail to a customer.
“We require all of our suppliers to certify in writing that they use conflict few (sic) materials,” he wrote. “But honestly there is no way for them to be sure. Until someone invents a way to chemically trace minerals from the source mine, it’s a very difficult problem.”
And there are other complexities.
Human-rights groups like the Enough Project have pushed companies to stop using conflict materials in their products, ultimately helping to insert a provision into the Dodd-Frank financial reform law that mandates companies disclose when they buy conflict materials.
The Securities and Exchange Commission has yet to implement the rules, but the fact they’re coming has already led to big changes in the region – for better and worse.
A 2011 opinion piece in the New York Times called the law a catastrophe, saying smelting factories have responded by refusing to buy minerals from eastern Congo, even from legitimate suppliers.
“I heard from scores of artisanal miners and small-scale producers who used to make a few dollars a day digging ore,” freelance writer David Aronson said. “Paltry as it may seem, this income was a lifeline.”
But Aaron Hall, associate director of research at Enough Project, said that companies are figuring it out. He said that Motorola and Kemet, which makes capacitors, have set up systems that allow them to monitor and track materials. Meanwhile, the Electronic Industry Citizenship Coalition, whose members include IBM, Dell and Apple, launched a Conflict Free Smelter Assessment Program to identify facilities that aren’t using conflict minerals.
There are two points worth emphasizing here: One is that the industry is making some real changes, at least in certain parts of the supply chain.
The other is that fair trade doesn’t always come down to a simple moral choice. There are sometimes steep trade-offs and difficult questions. What’s the greater good: providing work to the desperately poor in the Congo, or preventing money from falling into the hands of warlords?
The final uncertainty surrounding the feasibility of fair-trade electronics is the most important one: Would enough consumers buy them?
On this question, there was a perfect split in my interviews between business experts, who said no, and advocacy groups, who said yes.
“The template is there and the world is waiting,” said Jeffrey Ballinger, executive director of labor group Press for Change.
But tablets and smart phones are volume businesses, meaning companies have to sell huge quantities of each short-lived version to make the numbers pencil out. A fair-trade stamp alone may not line up the buyers Ballinger speaks of, whose identities are often as wrapped up in their tech savviness as their political consciousness. To have any chance of success, the products would have to be technically comparable – without being far more expensive.
Big change in cost
In its recent exposé of working conditions at Chinese plants producing Apple products, the Times said various experts estimated building iPhones in the United States would add up to $65 to each device. But that doesn’t address the unsavory origins of the phones’ components – and doing so would surely raise costs higher still.
“Will people pay a social premium? Sure, some people would, but not enough to justify it,” said John Morgan, a business professor at UC Berkeley. “It still won’t make it economically viable.”
None of this is meant to argue that companies should get a free pass – or that we shouldn’t demand U.S. businesses use their clout to raise labor standards around the world.
It’s only to say that there aren’t any simple solutions to complex problems.
By: James Temple
HONG KONG (AP) — China is poised to overtake India to become the world’s biggest gold market this year as rising incomes fuel demand for the precious metal and a weak rupee diminishes Indian purchases, an industry group said Thursday.
The amount of gold bought in China rose 20 percent in 2011 over the year before to 770 metric tons, the World Gold Council said in its annual report. That put China behind only first-place India, where 933 metric tons were bought.
Worldwide, the amount of gold purchased rose 0.4 percent to 4,0671 metric tons worth $205.5 billion.
The council said it’s “likely that China will emerge” as the world’s largest gold market for the first time in 2012.
Rising incomes in China, which is the world’s No. 2 economy, have resulted in a surge in demand for gold jewelry and other luxury goods. China became the world’s largest market for gold jewelry in the second half of 2011 as demand rose in every quarter, the report said.
Gold bars, coins and other gold-backed products are also popular because of a lack of other investment options in China.
The long-term rise in the price of gold has also made it a popular hedge against inflation — gold hit a record nominal high of $1,891.90 an ounce in August, though prices have fallen since then. Gold futures for April delivery ended trading in New York on Wednesday at $1,728.10 an ounce.
Central banks, many in developing economies, also boosted gold sales as they sought to diversify their growing piles of foreign currency reserves. They bought 439.7 metric tons of gold last year, up from 77 metric tons the year before and the highest amount since 1964, the report said.
The poor performance of China’s stock and property markets — the other two main choices for Chinese with money to invest — is boosting the popularity of gold as an investment, said Albert Cheng, a managing director at the London-based World Gold Council.
The Shanghai Composite Index is down 20 percent over the past year while house prices are starting to fall after authorities put in place curbs to cool an overheated market.
Strong Chinese demand for gold also helped sales leap 33.5 percent last year in Hong Kong, a popular destination for wealthy mainland shoppers because of lower taxes in the semiautonomous Chinese territory.
Demand for gold jewelry in India, meanwhile, fell in the second half of 2011 because of the weakening rupee, which made gold more expensive.
Indians also grappled with high inflation last year that ate away their purchasing power, so they bought smaller amounts of gold, Cheng said.
NEW YORK (CNNMoney) — A growing number of states are seeking shiny new currencies made of silver and gold.
Worried that the Federal Reserve and the U.S. dollar are on the brink of collapse, lawmakers from 13 states, including Minnesota, Tennessee, Iowa, South Carolina and Georgia, are seeking approval from their state governments to either issue their own alternative currency or explore it as an option. Just three years ago, only three states had similar proposals in place.
“In the event of hyperinflation, depression, or other economic calamity related to the breakdown of the Federal Reserve System … the State’s governmental finances and private economy will be thrown into chaos,” said North Carolina Republican Representative Glen Bradley in a currency bill he introduced last year.
Unlike individual communities, which are allowed to create their own currency — as long as it is easily distinguishable from U.S. dollars — the Constitution bans states from printing their own paper money or issuing their own currency. But it allows the states to make “gold and silver Coin a Tender in Payment of Debts.”
To the state legislators who are proposing state-issued currencies, that means gold and silver are fair game, said Edwin Vieira, an alternative currency proponent and attorney specializing in Constitutional law. And since gold has grown exponentially more valuable, while the U.S. dollar continues to lose ground, the notion has become increasingly appealing to state lawmakers, he said.
The state gold rush: Utah became the first state to introduce its own alternative currency when Governor Gary Herbert signed a bill into law last March that recognized gold and silver coins issued by the U.S. Mint as an acceptable form of payment. Under the law, the coins — which include American Gold and Silver Eagles — are treated the same as U.S. dollars for tax purposes, eliminating capital gains taxes.
Since the face value of some U.S.-minted gold and silver coins — like the one-ounce, $50 American Gold Eagle coin — is so much less than the metal value (one ounce of gold is now worth more than $1,700), the new law allows the coins to be exchanged at their market value, based on weight and fineness.
Local currencies: In the U.S., we don’t trust
“A Utah citizen, for example, could contract with another to sell his car for 10 one-ounce gold coins (approximately $17,000), or an independent contractor could arrange to be compensated in gold coins,” said Rich Danker, a project director at the American Principles Project, a conservative public policy group in Washington, D.C.
South Carolina Republican Representative Mike Pitts proposed a currency system that would allow people to use any kind of silver or gold coin — whether it’s a Philippine Peso or a South African Krugerrand — based on weight and fineness. Pitts said in the bill, which currently has 12 co-sponsors, that the state is facing “an economic crisis of severe magnitude.”
Republican representatives from Washington State followed suit in January, introducing a bill that would also allow any gold and silver coins to be considered legal tender based on metal values. Minnesota, Iowa, Georgia, Idaho and Indiana are also considering similar proposals.
Many of the bills would make it possible for residents to exchange the physical coins for goods and services, so you could use coins to buy anything from groceries to a car as long as the store chooses to accept them.
However, most people aren’t going to walk around with such valuable coins in their pockets, said Vieira. Plus, calculating the value of the coins — especially if they come from different parts of the globe and are of different sizes and shapes — will get tricky.
Community cash: In each other we trust
It’s more likely that the states will create electronic depositories and accounts for the coins to make transactions easier, when and if the initial bills are passed, he said.
Utah Gold & Silver Depository is already developing a system where customers could use debit cards linked to their gold holdings. When customers swipe their debit cards to make transactions, physical gold and silver coins would be transferred between accounts in privately-owned depositories (or vaults) based on the market value of the metals.
Before deciding on a specific form of currency, some states — including Minnesota, Tennessee, Virginia and North Carolina — are considering proposals that would first require a committee to review their alternative currency plan.
The future of U.S. currency: The states’ proposals have been gaining steam among Tea Partyers and Republicans, many of whom also endorse a nationwide return to the gold standard, which would require the U.S. dollar to be backed by gold reserves.
Tea Party “father” Ron Paul is sponsoring the “Free Competition in Currency Act,” which would allow states to introduce their own currencies, and rival Newt Gingrich is calling for a commission to look at how the country can get back to the gold standard.
But it will be the individual states that could really get the ball rolling, said Vieira. Even if several of the current proposals get killed, the introduction of so many bills at the state level is drawing national attention to the issue, he said.
Funny money: 11 local currencies
Of all the state proposals circulating right now, Republican-controlled states including South Carolina, Georgia, Idaho and Indiana have the best chance of passing their proposed bills this year, said American Principles Project’s Danker. If just one or two states implement an alternative currency, it could have a Domino effect, he said.
“I think we could get a couple passed in this legislative session, and that would show this is mainstream, popular and it would be a justification for more of the risk-averse states for doing this,” he said.
There are, of course, many people who think the recent push for alternative state currencies should be stopped in its tracks. David Parsley, a professor of economics and finance at Vanderbilt University, said he thinks state-issued currencies are a “terrible” idea.
“Having 50 Feds” could debase the U.S. dollar and even potentially lead the country into default, he said. “The single currency in the United States is working just fine,” said Parsley. “I have no idea why anyone would want to destroy something so successful — unless they actually wanted to destroy the country.”
By Blake Ellis @CNNMoney