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Is gold a ”logical hedge” against paper currencies and other economic risks?

*Barron's, by Kopin Tan, November 15, 2010

”GOLD CLIMBED TO A FRESH record above $1400 a troy ounce last week, before slipping 2.7% Friday.  Despite the threat of tightening money supply, it’s hard to argue against the logic of holding onto some gold.

Much has already been made of gold as a hedge against depreciating paper currencies, and it’s an ominous sign that ahead of this weekend’s G-20 meeting, the U.S. has failed to extract a pledge from leaders to refrain from ‘competitive undervaluation’ of currencies.  But gold is a shield against other risks that could worry investors in 2011.”

”Gold should hold its value if paper currencies continue to slide, or if investors start fretting anew about everything from emerging-market bubbles to sovereign-debt defaults.  Another risk, flagged by Michael Hartnett, Bank of America Merrill Lynch’s chief global equity strategist, is that of U.S. municipal-debt defaults, since stagnant growth eats into tax revenues even as states’ obligations continue to swell.  If U.S. economic growth sputters, and credit-default-swap spreads of Illinois, California, Michigan, New Jersey or New York start to wobble, the government may be forced to step in.”

”Gold’s 25% gain this year pales next to the 54% surge for silver, which has well-understood industrial applications beyond the purely decorative.  Gold’s rally also is very much a function of the buck’s slide.  As John Roque of WJB Capital points out, $1000 bought you nearly 50 ounces of gold in 1930 and less than an ounce today, but gold has no more surged than the dollar has slipped nearly 99% over that stretch.

Besides, at about 1.15, the ratio of gold to the Standard & Poor’s 500 is still below the long-term average near 1.5 or levels pushing 3 in the 1970s.  And as long as the U.S. feels entitled to spend beyond its means — and it says something that our schoolchildren ranked 25th among developed countries in math and 21st in science, but are No. 1 in confidence — ‘it’s hard not to feel that the correlation between the West’s sense of entitlement and the price of gold will only grow,’ Trennert says.”

*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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