September 25th Questions

1) Why have the prices of gold and silver risen so much recently?
The prices of silver and gold have risen extremely recently due to the weakness of the dollar. It is considered a safe-haven for investors lately. The price of gold has six folded in the last decade and might still rise. The price of gold has increased as well due to the U.S. doing quantitative easing which lowers the value of reserves of countries which use the dollar as their reserve, therefor e.g. China is critiquing the U.S. and starting to buy gold instead of dollars.

2) Why has silver risen more than gold?
Silver has rissen more than gold due to two different aspects. The main one is that silver is much more widely used in production than gold. Silver is used for producing electronics mainly on the other hand gold in mainly used in jewellery, and since the world economy is come out of its trough and entered recovery already the demand for electronics as any other good has risen. The second factor is that silver is far below the gold-silver ration. Apparently compared to the current price of gold silver should be valued atleast twice as much as it is now.

3) Why may higher rates of world inflation make investors turn to precious metals for investment?
Higher levels of inflation cause investors to turn to precious metals due to the fact that gold does not have an inflation. The higher inflation on a currency the faster it looses its value, on the other hand gold will become more and more expensive if their is inflation making it a reasonable investment.

4) How are future decisions by the Fed likely to affect the price of gold?
Future decisions of the Fed will be very important on the gold price and unfortunately it is predicted that the Feds decision will decrease the price of gold. Since due to inflation the Fed will raise interest rates causing investors to pull their money out of the market and put it into banks causing the price of gold to drop.

5) According to the efficient capital markets theory (strong version), the current price of a commodity should already reflect all knowable factors that are likely to affect the price? Does this mean that speculative buying (or selling) is pointless?
Speculative buying or selling is not pointless since the efficient capital market theory does say that all the factors are reflected although everything might change over a split second. Someone may be speculating a huge crash in the economy due to the inflation rising or a natural disaster. The efficient capital markets theory does not reflect things that will happen in the future.

6) How is the price elasticity of supply of silver and gold relevant in explaining the magnitude of their price movements?
There is a bigger price elasticity in gold than silver since silver is a much more vital element for production of electronics. The main use for silver is production of electronics whereas over half of gold is used on jewellery. The price movement of silver has increased due to it having a very small elasticity in electronics since its a vital part, due to the economy being in recession the demand for electronics is increasing and silver is a necessary resource to produce electronics. On the other hand golds elasticity is slightly bigger since it mainly is used for jewellery. Jewellery can be spared and a substitute for it can be found. Since indias demand for gold has risen by 69% in the last year due to its weddings this might suggest that the elasticity of gold is actually not that small since for a wedding people will probably invest in actual gold than in a substitute for gold since it is a special occasion.