Gold: Barbarous Relic Or Investment Superstar? Part 1

Posted In: Central Banks, Commodities, Economy, Financial Markets, Gold, Inflation

I’m always fascinated to hear other’s views on gold as a hedge and investment. People seem to either love or hate the precious metal.

Sometime ago, I was discussing the merits of gold with my sister in Colorado. Her reply was that investing in gold was “un-American.”

Ever notice that when gold goes up in price you start seeing more of those commercials by gold firms like Monex? Well, here’s what “Saturday Night Live” had to say about that:

Last Monday, I saw the following comment posted on one investment website that I regularly visit. “GOLD is not a safe haven. Rather it is a speculative commodity. The speculators take advantage of those who still think it is a safe haven.”

Adding substance to the debate, Bloomberg reporter Michael R. Sesit had this to say about gold’s usefulness as a hedge and investment back on October 5:

One of the enduring dogmas of global finance holds that gold is a safe-haven asset. The precious metal is billed as a hedge against inflation, the ultimate insurance policy against geopolitical risk and protection during periods of financial-market turmoil. Investors — and there are many of them — who buy into these suppositions might as well believe in the tooth fairy.

Sesit argued that gold reached a record high of $850 an ounce in January 1980. If the spot price of bullion kept pace with U.S. inflation as measured by the consumer price index, gold would be selling for $2,128 today. He noted the findings by Goldman Sachs that since 1988, the correlation between bullion and U.S. inflation expectations is just 36% (meaning the price of gold rises and falls with inflation expectations 36% of the time). The relationship between gold and U.S. consumer price inflation is only 23%. Sesit also said that geopolitical risk had no lasting impact on the price of gold. He used the example of September 11, 2001, where gold was selling at $276.25 an ounce on August 31, 2001, less than 2 weeks before the attacks. However, after rising to as high as $295.10, gold had retreated all the way back to $274.25 by October 23. The reporter alluded to gold’s other drawbacks as well:

Nonetheless, bullion has no direct link to economic growth as do other commodities, doesn’t earn a return, offers limited hedging advantages and hasn’t kept pace with inflation. Moreover, the world’s biggest holders of gold, major central banks, aren’t overly eager to keep owning it.

It seems like all this bad-mouthing of the “barbarous relic” may be justified. However, if what Sesit says is true, then why has the price of gold soared this year, rising from $636 an ounce to $845 last week, a 27-year high?

(Part 2 will be posted on Monday)

Sphere: Related Content