Where will the gold market go when the perception of low inflation cracks?
*MarketWatch, by Matthew Lynn, June 6, 2011:
On the one hand, there are the gold bugs, for whom the metal is the
one true currency. It's been used as money for a few thousand
years now, and against that kind of history a couple of months of
rising or falling values don't make any difference. To them, no
price is ever really high enough. If every other asset is being
trashed by wicked central bankers printing paper money, why not just
keep on buying? After all, it's bound to be worth more than those
brightly colored pieces of paper.
On the other hand, gold's detractors are just as adamant that it isn't
worth anything. Like John Maynard Keynes, they regard it as a
'barbarous relic.' Sure, you can make wedding rings from it, but
apart from that it's useless. At least with copper you can make
pipes, and bonds generate an income. But gold is mainly a
psychological asset. It's worth something because other people
think it is. There are no reliable yardsticks against which we
can measure its value.
The truth is somewhere in the middle. Gold can certainly move
into bubble territory, just like any other asset. But its core
function is as a safe alternative to cash during periods of prolonged
and destructive inflation.
And here's the important point. While plenty of analysts -- including
this writer as it happens -- think we are heading for a period of
steadily rising prices, that certainly isn't the consensus yet.
Just take a look at the government bond markets. The yield on US
Treasury bonds is still at record lows. The same is true of most
European government bonds, apart from those countries that are already
bust. That wouldn't be true if the markets were expecting huge
price rises.
In reality, the markets are still priced for low inflation, even
deflation. At some point, that consensus is going to crack.
Central banks will be forced to raise interest rates -- and potentially
quite sharply as they wake up to the fact that inflationary
expectations are getting out of hand.
And what will happen then? Bond markets will collapse -- that's
certain. Equity markets will wobble. The historical record shows
that equities are a poor hedge against rising prices, and they usually
do poorly when interest rates are rising.
Where is everyone going to flee for safety? To gold, of course.
As rates start to rise, and fighting inflation becomes the main task of
central bankers rather than warding off another great depression, the
price of the precious metal will soar.
That will be the blow-out phase of the 12-year bull market.
It might happen next year, or it might be 2013. And gold might
hit $2,500 an ounce or $3,000. Or even more.''
*This information is solely a highlight of the opinion of a third-party publication and is incomplete. Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.
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