Gold, has been around for 5000 years
That barbaric 5000 year old metal, gold, is just $30+ from $1000 and just a few dollars more from its all time record high. I’m not familiar with any other asset that is this close to its record high and not coincidentally coincides with the dollar index being near its record low. Gold is now up 31% since Oct ’07 when the SPX peaked at 1565. Because gold doesn’t have much industrial use (mostly electronics and dental, 8% of total demand), jewelry (33% of demand) and investment (59% of demand) are the two main sources of demand. India in fact is the biggest buyer of gold jewelry. With high prices discouraging jewelry purchases, the main source of buying this year has come from investments. Why would someone buy a piece of metal that yields nothing and doesn’t have much economic relevance other than looking nice in a necklace? Because it is perceived as another currency that is not a fiat one, because it historically has risen in line with inflation and because it’s perceived as some place of safety. If markets telegraph investor thoughts on the future, gold’s action is an interesting dynamic with the S&P 500 back to 1000 after a rally of 50%, the 10 yr bond yield at 3.70% versus its 47 year average of 6.90%, inflation expectations over the next 10 years below 2% according to the TIPS, an expected July CPI reading of -2.1%, the biggest drop since 1949 and a Federal Reserve that is made up mostly of those who think inflation is subdued and will be for the next few years.
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August 4th, 2009 at 3:57 pm
Only time will tell, who was right….
August 4th, 2009 at 4:14 pm
“… because it historically has risen in line with inflation …”
Only loosely, it all depends upon what intervals you measure. If you compare it peak-to-peak since 1979-ish, on a real value basis, it has performed pretty poorly as an inflation hedge over the past 30 years, with an inflation-adjusted equivalent price to the peaks back then of over twice today’s market price. And if one says that the true peak to compare it against is yet to come, I have to ask why they would put up with such a poor defense against inflation over the past 30 years. As I said, it all depends on what intervals one uses to evaluate it as any sort of inflation protection.
And of course, as a hedge against deflation, it works not so well at all.
It works much better as insurance against currency panics (widespread fear that the fiat currency is in imminent danger of collapse), along with just about any commodity or (perceived) sound foreign currency that is not in peril at the same time.
August 4th, 2009 at 4:17 pm
“Perceived as” being the operative phrase here. Money is an abstract social construction, not something that occurs in nature; money is whatever people believe is money. Gold is not, in fact, a medium of exchange. You can’t spend it, pay your bills or taxes with it, or do any of the other things one normally does with money. If “people” believed it was an “alternative currency,” you could do that. You could go into a a store, put some gold down on the counter, and buy stuff with it. But you can’t do that. It remains a commodity that some people believe has some nominal monetary value, and may have more in the future, and they are willing to gamble on that. If most of the “action” is investors, then it means that the investors buying today have to try to convince a subsequent set of investors that they need to pay more tomorrow. Now, where did I see that happening recently? There’s a word for that.
August 4th, 2009 at 4:29 pm
Gold is an asset. It performs like one, though more like what Moopheus states than what the general consensus states it should.
Like all assets, they are subject to irrational exuberance (aka, bubbles).
We have quite a bubble in some commodities right now. But, like other bubbles in the past, noone knows when these burst or where they top out. My spidey sense tells me that Oil just finished its, but gold is still going to run a deeper and longer bubble than other commodities because of the supply constraints. A fool and his money…
That’s fine with me, I’ll be investing in something that actually pays me a dividend AND is an inflation hedge.
August 4th, 2009 at 6:46 pm
Few things are enjoyable as watching the sheeple get all hot and bothered by that which they do no understand. Gold being a prime example.
Why do you bother try to rationalize your ignorance to others? Its cool if you aren’t into gold, but why does the mention of gold seemingly vehemently compel so many to prove they don’t have a clue what they are talking about?
August 4th, 2009 at 9:02 pm
Larry Summers and Robert Barsky, “Gibson’s Paradox and the Gold Standard”
http://www.gata.org/files/gibson.pdf
In a nutshell, the authors point out that when real interest rates are positive, the price of gold declines as people prefer the government’s paper currencies. The converse is also true – when real interest rates are negative, the price of gold increases. Gold is a sort of “the canary in the coal mine” for all fiat currencies – when the price of gold rises, this is the prime signal that the currency is being debased.
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—- Abstract —–
This paper provides a new explanation for Gibson’s Paradox — the observation that the price level and the nominal interest rate were positively correlated over long periods of economic history. We explain this phenomenon interms of the fundamental workings of a gold standard. Under a gold standard, the price level is the reciprocal of the real price of gold. Because gold is adurable asset, its relative price is systematically affected by fluctuations inthe real productivity of capital, which also determine real interest rates. Our resolution of the Gibson Paradox seems more satisfactory than previous hypotheses. It explains why the paradox applied to real as well as nominal rates of return, its coincidence with the gold standard period, and the co-movement of interest rates, prices, and the stock of monetary gold during the gold standard period. Empirical evidence using contemporary data on gold prices and real interest rates supports our theory.
………..
Conclusion:
“The price level under the gold standard behaved in a fashion very similar to the way the reciprocal of the relative price of gold evolves today. Data from recent years indicate that changes in long-term interest rates are indeed associated with the movements in the relative price of gold in the opposite direction and this effect is a dominant feature of gold prices.”
August 4th, 2009 at 10:06 pm
5000 years is the wrong way to think of it. Think of it the other way around. For lack of a better term, we’ve only known the “non-major world currency player” version of gold for +/- 38 years (plus some time during WWII). The Pound Sterling and U.S. Dollar have both had much longer uninterrupted histories as “major world currency players.” Based on the current status of gold versus currency, I’m not sure how the 5000 year history of gold as a trading currency tells us much about today.
August 4th, 2009 at 10:16 pm
“Why do you bother try to rationalize your ignorance to others?”
Oh, right. I forgot; we’re supposed to bow before the superior wisdom of goldbugs. And Larry Summers.