Sunday, August 07, 2011

Gold and the Recession

It’s funny how Gold is thought to be a ‘safe haven’ investment every time there is talk of a recession.

If you look at the historical prices of Gold, you see that it is not always a one-way street. It has fallen in the past and has also remained flat for long periods of time.

monthly_dollar

(Source: http://www.goldprice.org/30-year-gold-price-history.html)

I’m no Economist, but the current wave of gold speculation looks suspiciously like the one around 1980.

Neither should it be a surprise. Beyond it’s inherent utility as an ornamental product and some industrial applications, gold has little utility. Unless I am mistaken, it is not linked directly to any currency since 1971 (see here: http://en.wikipedia.org/wiki/Nixon_Shock)

So what good is it ? Why is it’s price going up ? As far as I can see it is speculative. And the trouble with speculative wealth is that it is only “wealth” as long as someone is willing to buy it from you. Sooner or later a price level will be reached at which there would be no buyers left, and at that time a panic sell-off might well start.

As I mentioned above, I’m not an Economist, so if I’ve got something wrong here, I’d love to be corrected by some expert – because I also want to find a safe haven if there is one !

1 comment:

  1. Usman Bajwa3:37 AM

    Gold attracts the investors mainly due to its " scarcity value". It is a pure financial commodity which has very low holding costs compared to other commodities hence very attractive to investors.
    On the pure demand side historically there is a strong correlation between rising incomes and gold prices. Deregulation and opening up of the gold markets to local investors and consumers in China and India have driven up the fundamental demand too. These two countries now account for 50% of the global demand. Combine this phenomenon with golds attractiveness as " Flight to Safety" avenue in a negative real interest rate environment and one can start understanding the dynamic of gold price hike.
    Supply will react to higher price will react to higher prices but the response takes many years.

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