Is gold an attractive investment to rise in value against the dollar and other currencies?
*Financial Times, January 8, 2008
Gold is the New Global Currency
“There was a time when gold was money. In today’s uncertain world, the yellow metal is back in fashion. Bullion prices rose to a record nominal high after the assassination of Benazir Bhutto in Pakistan added to nervousness about the world economy. Part of gold’s allure is its traditional status as a safe haven. It is seen as a store of value when everything else seems risky. But the bigger drivers behind the rising spot price are a depreciating dollar and the prospect of negative US real interest rates.
A better way to think of gold may be as central bankers used to before America dropped the gold standard: not as a commodity, but as another currency. As long as the dollar stays weak, gold’s bull run will last.
The arguments for further gains in the gold price are compelling. It looks cheap, despite climbing from a low of about $250 a troy ounce in 1999, when central banks were selling reserves. The UK’s decision back then to sell 60 per cent of its official holdings looks particularly poor judgment.
Prices have a long way to go before they approach the inflation-adjusted record touched in 1980 when Soviet tanks invaded Afghanistan. At yesterday’s $859, gold was trading at less than half that level. It could top $1,000 and still be at the lower end of what some analysts argue is a safe haven range.
Gold is also benefiting from diversification away from equities. Commodities have emerged as a distinct asset class, with billions of dollars poured into exchange traded funds. Physical demand for jewellery may have stalled in Asia, but consumption remains strong in the Middle East. Declining output in South Africa will help support spot prices.
But it is the relationship between the dollar and the reaction of the world’s central banks to the credit squeeze that some bulls would say really makes gold an attractive bet.
The US Federal Reserve’s aggressive, rate-cutting response to the credit squeeze has created a risk of a sharp rise in American inflation. That in turn creates the risk of a precipitous fall in the dollar and so makes gold more attractive as a hedge.
The world’s major economies have experienced rapid money supply growth of 10 per cent plus per annum in recent years. The Fed remains the world’s biggest holder of gold, yet supplies of the metal are growing at only 1.5 per cent a year. If gold is a finite currency, its value against not just the dollar, but sterling and the euro too, should rise.”
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