Gold recently surpassed the $1,000 per ounce mark which was (in the past) a kind of financial landmark that would be mentioned along with flying pigs ‘yeah right! And Gold will be a grand an ounce!’ – you get the picture. But now that its a reality, along with oil being over a hundred bucks a barrel is it time to give one of mans oldest financial instruments a second look?
Gold like anything is driven by the market and that’s why it crossed the $1,000 dollar mark, and at the same time Oil hit the $110 barrel mark, that’s partly due to the gold/oil/dollar correlation which was mentioned (and graphed) in a previous post.
Commodities have been in an 8 year bull run and for some reason they have not been getting the press attention they deserve until perhaps the last year, and it still hasn’t topped out? Why? The situation that we have today is that we are in a different economic environment than we used to be, partly because the worlds economy is no longer US-centric. There is the meteoric rise of China, and a fast following India, they are skewing the traditional models which placed the USA firmly at the centre of the universe.
China and India were super powers before the industrial revolution for hundreds of years, then they missed out for a long time, however they are now industrialising and playing catch up. They are creating wealth and manufacturing while the west is spending wealth and moving away from real production. The fall of the west is equally counterbalanced by the eastern rise. There is definitely a yin-yang analogy in there somewhere.
Back to Gold though, the worlds currencies are not asset backed any more, but that doesn’t mean gold doesn’t have a value, in fact since 2005 individual ownership of gold has surpassed that of central banks. Gold is money in a world gone mad. I don’t know that gold is actually going up in inherent value, its more a case that continued printing of money and the fall off in currency value is implying its past wealth onto gold. So as currency devalues gold goes up in value.
Inflation is going to squeeze everybody who doesn’t hold gold. In history gold was always held and used as money, the conquest of South America by the Spanish was largely due to the gold the natives had, only in the last 30 or so years has this stopped, it was the case when the Bretton Woods regime ended. Bretton Woods regime refers to the time when every dollar in circulation had a relevant (and real) gold backing. When people think of currency they often rationalise currency prices using this mentality although this actual system has not been in place for almost 35 years.
In a volatile stock market gold holds real value, interest rates on the other hand are not real when matched to inflation, the previous post on first time buyers shows that property lost to inflation and deposit rates of less than 4% for anything significant seem to be the norm, you can get 7% and more for regular savings but you can’t lump all of your money in it has to be drip fed. Gold can be an inflation hedge and it can also be used as actual cash in a crisis. That’s why it has and will continue to be popular during any massive crisis.
Holding gold on a personal basis is up over 11% in the world in the last year. Simple markets hold gold in high regard, and thats mostly due to the fact that economies in the developing world are not always healthy and therefore they put their faith in gold, people who do this have found that when the crisis is over their gold is still worth something while the paper currency may be worthless. This lesson was learned in Asia during their currency crisis in the late 90’s and also in South America when the Brazillian Real and Argentinian Peso faced crisis a few years after the Asian currency crisis.
Gold seems to hang around, it doesn’t dissapear or go back into the ground, most of the gold mined is still in existence today, the gold stolen from the Incas is now part of jewellery that is still worn. The rise in gold prices is unprecedented, there have been five gold bull markets, and they normally lasted a year or two and then had a long period of little or no movement -note: they didn’t go backwards though in terms of a fall below previous values- this current gold bull run is the biggest and longest in history. There are simply hundreds of reasons to hold gold, in this age of turbulence holding something with real value is vital.
Its also accessible, you can get into gold with an ETF or you can buy coins (which may have a higher value because of the value of the coin, not just the metal, or by investing in gold mining companies. Only 1.4% of the worlds wealth is in gold, but the rise in gold may not be over by a long-shot yet. Gold investors don’t sell, in the last half century there were only three times that gold sellers were net sellers rather than buyers. So when the money goes out of liquid wealth: stocks/deposits and into gold then there may be another boom in its price.
Coca cola has a market cap of 134 billion, Microsoft has 260 billion, the gold market on the other hand is only 174 billion. Gold is money but also a commodity. The big driver is investment demand though, you can’t eat gold you can’t live on it and that’s why its fundamentally different than other commodities like corn or wheat that going up in price.
As an alternative asset gold often has an inverse correlation to the stock market, it can be a hedge against currency. All currencies are falling against gold. It can be used as an inflation hedge, it can be used as a safe haven, it can be used in jewellery, in the Middle East and Asia people often buy actual gold as their savings.
People often don’t understand what actually causes inflation, they mostly know about it because of its symptoms, and then government offloads the burden onto central banks. By lowering interest rates or printing money you create inflation, and the solutions currently being put forward by the Fed are going to make inflation even worse.
Some commentators think that gold will go to $5,000 an ounce. I fear to think of that! But having said that I am going to buy gold! Everybody understands oil, but they don’t get gold. Half of last years gold was bought in India and that is down to their culture, that culture will not change any time soon, because of it you can rest assured that gold will continue to rise in price as developing economies mature.