A combination of several factors, including a declining dollar and the Federal Reserve’s announcement that it would keep interest rates at virtually zero until late 2014, helped to send gold and silver prices soaring to multi-week highs. Analysts expect the upward trend to continue as paper currencies founder and gloomy news continues to dominate the economic headlines.

The spot price for gold was around $1,725 by 2 p.m. Eastern time after jumping more than $60 since the day before, up almost 30 percent from a year ago and more than 7.5 percent over the last 30 days. It smashed through $1,700 on Wednesday for the first in six weeks.

“At the moment everything points to even higher prices, given the strong risk appetite, the better mood among market players, the strong equity markets and the weak dollar,” Commerzbank analyst Daniel Briesemann told Reuters.

Analysts said the single most important factor behind gold’s strong rally was the Federal Reserve. On Wednesday, the privately owned central bank promised to keep short-term interest rates at rock bottom until late 2014, extending the date from its previous pledge to keep rates down until mid-2013.

Also bullish for gold — and bearish for the U.S. dollar, of course — was Fed boss Ben “helicopter” Bernanke’s veiled threat to unleash more so-called “Quantitative Easing,” known in simpler terms as creating new “money” out of thin air and pumping it into the economy by purchasing bonds. The dollar immediately took a hit against other major currencies.

“The framework makes very clear that we need to be thinking about ways to provide further stimulus if we don’t get improvement in the pace of recovery and a normalization of inflation,” Bernanke said during a quarterly news conference after the Fed’s report was released. Analysts and central bank critics, already concerned about massive monetary “easing” in recent years, lambasted the idea that more money would solve the economic problems plaguing America.

“If the Federal Reserve thought the economy was improving, it wouldn’t need this artificial prop to keep sustaining it,” said Euro Pacific Capital head Peter Schiff, noting that wild money printing was helping to drive the nation and its economy off a cliff. “The President and the Federal Reserve are now conspiring to create a much bigger crisis.”

The Fed claimed it would be targeting a 2-percent rate of annual inflation for 2012. However, few analysts take the government’s “Consumer Price Index” (CPI) measure of inflation seriously — especially as Core CPI, one of the most frequently cited figures, omits price increases in key sectors like food and energy.

According to Schiff, the government’s claim based on CPI that inflation for 2011 was 3 percent is completely bogus. It was actually much higher, he said, noting that officials were using phony measures like the CPI to mask the true rate of inflation. And it is likely to be even higher in 2012 before eventually morphing into a full-blown currency and debt crisis in the coming years.

“The reason they have to keep [interest rates] so low is to artificially support a phony economy,” Schiff explained. “This economy is a disaster waiting to happen — the only thing standing between us and economic Armageddon is zero-percent interest rates.”

But it can’t go on forever, and the longer rates are kept so low, the worse the looming crisis will be. For now, Schiff, whose business trades gold and silver, said investors should protect their assets by purchasing precious metals “before the price goes any higher.”

An analysis by Bloomberg published on Wednesday showed that gold — which has increased every year for more than a decade — provided the best return on investment over the last five years when adjusted for volatility. And heavy-hitting financial firms cited in the report including Goldman Sachs and Morgan Stanley are forecasting that gold prices will keep rising to around $2,000 in 2012 or 2013.

“People are still very under-invested in gold, and so there is a huge scope of that increasing,” explained UniCredit analyst Jochen Hitzfeld, the most accurate precious-metals forecaster tracked by Bloomberg over the past two years. Other experts noted that gold is widely and accurately perceived as a safe-haven in times of economic turmoil.

While gold prices have been extraordinarily volatile — spot prices hit $1,923 in September before crashing to $1,523 by the end of 2011 — the longer-term rally has so far been relatively consistent over the past decade. Just 10 years ago, gold was worth less than $300 per ounce.

Silver, which has also seen drastic price fluctuations, was less than $5 per ounce 10 years ago. In 2011, it surged to an all-time high of around $50 before dropping back down to about $33.35 today. The U.S. dollar, meanwhile, has not been doing so well — even when measured against other depreciating paper currencies.

Even billionaire investor George Soros, whose well-publicized sale of some 99 percent of his gold holdings during the first quarter of 2011 spooked precious-metals investors, has jumped back into the market. According to Securities and Exchange Commission (SEC) filings cited by Bloomberg, the hedge-fund manager had increased his stake in SPDR Gold Trust, an exchange-traded fund tracking gold prices, to almost 50,000 shares as of September 30.

Central banks around the world were also buying up multi-ton quantities of gold bullion, according to data cited in news reports. And the trend shows no signs of slowing down.

In other bullish news for the precious metal, unconfirmed reports indicate India has started purchasing oil from Iran using gold rather than U.S. dollars. China could follow, too, according to news reports.

“It shows the exodus from the dollar is gaining speed,” noted precious-metals and currency trader Simit Patel on the investment analysis site Seeking Alpha. “With the major economies of the world facing $7.6 trillion in bond payments due this year, I think the tipping point for a shift out of dollars and into a new monetary system backed by gold is not as far off as it may seem.”

With the steep drop in prices during the last few months of 2011, some analysts and traders were reluctant to get back in the precious-metals market before the appearance of a solid bottom had solidified. But the big banks and respected analysts are forecasting that as long as the fundamentals — out-of-control money printing, sovereign-debt crises, wild government spending, and more — remain the same, gold and silver prices could see massive gains in 2012.

Source: New American.

*Taken from the Ludwig von Mises Institute. Written by Robert P. Murphy.

“That’s quite a markup,” remarked my father as he paid for my six-year-old son’s treat after a soccer game. “Three dollars for a cup of ice.”

It’s true; the price tag did seem steep at first. But as we analyzed the situation more carefully — my father is also a fan of free markets — we realized that there was no reason to be outraged at the vendor’s price.

The Context

Before speculating on the ins and outs of the frozen-drink market, let me give the background. My son plays soccer for a town league. Every Saturday, the teams all play each other at one central location, with at least 20 little fields set up for the various age brackets. During the course of the day, I’d guess that at least a thousand people (counting spectators) cycle through the fields.

During Easter weekend my parents were visiting, and we all went to my son’s game. My son pointed out with enthusiasm a truck that was parked in a very accessible area, because it housed ice drinks. (I think technically they were not the ICEE brand, but it was the same idea.)

After my son’s team absolutely blew out their opponents, I suggested to my son that if he asked nicely, Grandpa would probably buy him a treat at the truck. And now I have brought all readers up to speed from where our story first began. …

How Could Somebody Charge $3 for a Cup of Ice?

As a card-carrying armchair economist, I did not conduct any actual research for this article. Nevertheless, it may interest some readers to learn how to think like an economist on such everyday puzzles.

Factors on the Demand Side

The first important point is that my father voluntarily paid the $3 for the refreshment, albeit with some significant social pressure leaning on him after the promise made to my son. But if, for example, he had gotten to the truck and the sign said each frozen drink cost $30, my father clearly would have walked away. We could’ve told my son that it was too much money, and that we’d stop at a convenience store instead.

We already have more insight into the “high” price of the drinks — their extremely convenientlocation. An ice-cold-drink-at-the-store is not the same good as an ice-cold-drink-next-to-the-soccer-field. There is nothing irrational or “uneconomical” about consumers being willing to pay more for the immediate quenching of their thirst.

Although I obviously didn’t think it through at the time, I realized in retrospect that when I suggested to my son that my dad would buy him the treat, I knew that the price had to be “reasonable,” because the truck had obviously been at the games before (since my son recognized it), and because I could see a crowd of people in front of it.

These considerations shed some light on the “demand side” of the equation. Especially because it was a hot day, it’s no mystery that so many people were willing to exchange $3 for a “cup of ice.”

Factors on the Supply Side

Now let’s look at the supply side. In general, if we’re trying to understand why a price might be high, it’s not enough in economics to explain that people really value something. We need to go further, and explain why the quantity supplied stays low enough so that what’s called the “marginal utility” of the small number of units remains high.

Let me clarify with a different example. If someone were selling bottles of water at $100 a piece, we could explain that by saying that the consumers valued each bottle more than the other goods and services that could have been obtained with the $100. However, because that price is so unusually high, we would want to explore the situation more in order to figure out why more bottles weren’t being channeled to these particular consumers, who were obviously on the verge of dying of thirst.

By the same token, we can speculate on the “supply side” of our frozen drink supplier, to see if the apparently high price of $3 really isn’t so surprising after all.

One obvious observation is that it was a hot day, and so refrigerating the ice in a relatively small container (i.e. that could fit in a truck) might be expensive, especially because it has to sit in the hot sun for at least several hours. The vendor also had to buy the sugar flavoring (available in several colors) that the kids would squirt into their “cup of ice.” Who knows how much those cost to restock, but the vendor would also have to worry about some kids dribbling large amounts onto the ground before their parents intervened.

Another obvious expense in the operation was the truck itself. This wasn’t some guy’s F-150 with a cooler thrown in the back; the whole truck had been configured to sell frozen treats. (For example, one side of the truck was painted full of descriptions of the available items.) Now, perhaps the owner used the vehicle for his personal transportation needs, but it’s possible that the truck was dedicated entirely to his business. In that case, the $3 per sale would need to cover not just the ice, cup, and flavoring, but also a tiny portion of the truck payment and upkeep, including gas.

Another major cost was the vendor’s time. I love watching my son play, but I know I’m ready to get the heck out of Dodge when the game ends. In order to make it worthwhile to stand at that field for several hours, the vendor would have to charge a high enough “markup” to pay himself a decent hourly wage.

Yet another consideration is the risk involved. If there are thunderstorms (or even if the field is too muddy from previous rains), all the games would be cancelled on a particular Saturday. (I think they make them up — if at all — with double-headers in subsequent weeks, rather than extending the season.) So when deciding on his pricing strategy, the frozen-drink vendor would need to consider that he might miss out on a large fraction of potential sales due to weather. If the weather is particularly cold, then it might not make sense to drive the truck to the field even if the games are on.

Finally, we have to consider that the coveted location is itself valuable. The truck’s owner obviously had to get permission from the league to be able to park right in the middle of all the fields, so that the majority of parents and kids would pass near it on their way home. This is what gives the truck vendor such an advantage over his competitors in nearby convenience stores and restaurants, and the soccer league might charge him a fee for this privilege (unless he’s friends with the people running it).

Depending on the fee that might be charged for use of the location, the entire problem might get pushed back a step. Rather than asking, “How can this vendor get away with skimming so much off the parents?” we instead would want to know, “How can the soccer league get away with earning so much from providing concessions during the games?”

Conclusion

The point of this article wasn’t to say whether $3 for an iced drink was “too high” or “just right,” according to some particular theory of justice. Rather, as dispassionate economists, we can analyze why consumers were willing to pay so much for each unit of a good, and why producers didn’t rush in to sell more units at a lower price. Such an exercise is useful in understanding how the world works, and it also promotes social harmony when we see things from another’s perspective. And believe me, social harmony is valuable indeed after a bunch of parents have watched their 6-year-olds play soccer.

David Boaz (CATO) joins John Stossel to discuss one way government utilizes social concerns to combat individual liberty.