Price plunge only a temporary tarnish for gold, which still glitters with promise
There are three primary reasons to invest in gold.
In addition to acting as a hedge against inflation, gold is an insurance against monetary catastrophe and a medium for speculation.
Today, inflation appears tame, with growing evidence of recession. As investors move toward cash, commodities — including gold — decline in price, especially when valued in strong dollars. Troubled Eurozone countries might be forced to sell gold as a prerequisite to receiving further bailouts.
Selling by speculators and inflation hedgers has pummeled gold prices, sending them down about 35 percent from their high. Last week, The Financial Times reported one hedge fund manager, John Paulson, losing $1.5 billion in gold. Has gold lost its luster?
After the Sept. 11, 2001, attacks, the Federal Reserve opened all monetary spigots threatening inflation. Hedgers swarmed in, pushing gold from less than $300 to more than $1,000 an ounce, far out-performing equities. That attracted momentum playing hedge funds and speculators, which drove gold to its record high of $1,920 an ounce on October 19, 2008.
Weeks later, in late 2008, the recession pulled commodity prices down. Inflation hedgers sold gold in trades from $1,600 and $1,800 per ounce. This narrow price range did not allow recent gold investors returns competitive with equities or bonds feeding on the morphine of Quantitative Easing. By early 2013, gold had fallen to about $1,500.
In March, the prospect of future bailouts for Cyprus hinted at forced sales of Cypriot Treasury gold. Cyprus has just 14 tons of gold. If Cyprus is forced to sell, it could herald far larger distress sales by other debt-troubled Eurozone nations, including Portugal (382 tons), Italy (2,452), Greece (112), Spain (282) and even France (2,435 tons). That's 5,677 tons, or about 18 percent of all gold held by central banks. The potential overhang apparently encouraged further sales by speculators, causing gold to threaten key support levels as low as $1,300, $1,150 and $975 an ounce.
Recent downgrades of global economic growth rates forecast by the International Monetary Fund, increased statistical evidence of looming recession and the recent gold sell-off have squeezed out many inflation hedgers and speculators.
However, some inflation hedgers are well cushioned, having invested at below $1,000. Furthermore, as evidence emerges of growing official skepticism about the effectiveness of QE and speculation as to its possible reduction, some investors sense increased risks of monetary trouble — even catastrophe. Their concerns appear to be shared by central banks, which continue to accumulate gold.
In particular, the central banks of newly rich nations have very low ratios of gold to paper in their reserves. For example, China has 1,054 tons or about 2 percent of its total reserves. China's thirst for gold is shared by other surplus nations.
Investors fearing monetary catastrophe might do well to imitate central banks, who are the ultimate insiders. However, some might wish to hedge, at least while recession threatens.
John Browne, a former member of Britain's Parliament, is a fianancial and economics columnist for Trib Total Media. Email him at email@example.com.
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.
- Rossi: Longing for when `Browns Week’ mattered
- Four issues that the Steelers need to take care of in September
- Cardinals rough up Locke in 6-4 victory over Pirates
- Penn State football team’s future won’t include ‘Distraction’ trips
- Steelers notebook: Tomlin won’t discuss discipline for Bell, Blount
- Worker driving vehicle hurt at Pittsburgh International Airport
- Greensburg sues man, attorney over ‘frivolous’ case
- Steelers bracing to face 2 quarterbacks vs. Browns
- High school roundup: South Fayette opens section play with victory
- Pitt well-stocked along offensive line
- HS highlight reel: Highmark set to host HS matches