Recession fears hit gold hard
Many investors have purchased gold as a hedge against inflation. Growing signs of recession have caused alarm, however, turning buyers into sellers.
In response, the price of gold has fallen substantially, dropping below important technical support levels. What should investors do?
A hedge against inflation is not the only reason for acquiring gold. There are five other reasons that justify an investment in the precious metal turbulent times.
Most people consider gold to be an inflation hedge. In recent times it has been, but only over certain periods. Because many people forget to adjust for inflation, the myth continues that gold is a constant inflation hedge.
Last week, minutes of the Federal Reserve Board's Open Market Committee indicated there is increasing disagreement as to how long quantitative easing (QE) measures by the government, such as an artificially low prime lending rate, should remain available.
In addition, cuts in government spending — referred to as “sequestration” perhaps because it doesn't sound as harsh — have reentered the political discussion. Both carry recessionary implications.
Furthermore, economists at Shadow Government Statistics say government figures show the United States is still in recession despite political talk to the contrary. The European Union, United Kingdom and Japan also teeter on recession, according even to official figures.
These growing signs of recession are squeezing out many investors who invested in gold as an inflation hedge.
In a recession, assets, including commodities, fall in price as cash rises in value. Gold, though, is not merely a commodity. It is the ultimate form of cash. This creates an inherent dichotomy.
Gold defends against currency debasement. Closely linked to inflation, buyers view Fed talk of an early end to QE and rising interest rates as strengthening the dollar, encouraging gold sales.
Investors buy gold for portfolio diversification. When financial markets fall, they sell their liquid gold to finance margin calls.
Major traders buy gold on the basis of supply and demand. China, the world's largest producer, sells no gold.
From a peak of $1,927 an ounce in 2011, gold's price decline has prompted producers to abandon marginal deposits. Angelos Damaskos of the Junior Gold Fund was quoted in The (London) Telegraph as saying this strategy will “inevitably cause a significant decline in global production.”
“Should economic events take a disappointing turn,” he added, it could cause a “global supply crunch” that could potentially send gold to $2,000 an ounce.
Most importantly of late, gold is hoarded as insurance against political, economic or currency collapse. When catastrophe strikes, it usually is without warning. Extended bank holidays, market closures, foreign exchange controls and other measures occur overnight. Investors have little or no time to escape, even from positions held in normally liquid assets.
Gold has survived throughout recorded history as the ultimate form of money. Gold surplus nations such as China and Russia are aggressive buyers.
As the world struggles to balance the forces of economic recession against currency collapse, investors deciding whether to buy gold should consider that the ultimate insiders — the central banks of most major countries — own thousands of tons of it.
John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Total Trib Media. Email him at firstname.lastname@example.org.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Penguins call up prized defensive prospect Pouliot
- Pittsburgh police break up customer fights over Air Jordan 11 shoes
- Undersized Beachum quietly excels at 1 of game’s pivotal positions
- Steelers notebook: Polamalu, Taylor unlikely to play, Harrison ‘ready’
- Michigan State defensive coordinator a Pitt coaching candidate
- Penguins’ defensive depth proves valuable
- Pitt: Football coach hire comes 1st, athletic director 2nd
- Pirates sign Corey Hart to 1-year deal
- Hotel building boom sweeps Pittsburgh region
- Pittsburgh adjusting to new bicycle lane, ‘stop boxes’
- Pitt’s acting athletic director is deft facilitator