Due in no small part to the budget madness of the Obama admin which managed to hit a deficit of 1.4 trillion last week, gold has gone through the roof again. This is not a one time event either, as far back as April Gold skirted the thousand dollar per ounce mark, only to slightly decline. Once again that barrier has been broken, with a possible end price of 3,500.
But blaming the rise on ETF purchases does not answer the fundamental question; why do investors want exposure to gold at all? The dollar is the prime suspect. Gold’s rise coincided with a fall in the greenback on a report (since denied) that oil-producing countries were talking about replacing the dollar as the pricing currency. When the dollar falls, as it has since March, risk-averse investors tend to buy gold. That decision has little opportunity cost now that interest rates are so low (gold has no yield, of course)Can the trend go further? Christopher Wood of CLSA, a broker based in Hong Kong, has a long-term target of $3,500 an ounce, the equivalent in purchasing-power parity terms of the metal’s 1980 peak. Mr Wood says investors see gold as a hedge against the depreciation of paper currencies, particularly those in the west. Gold is not just a hedge against inflation, in his view, but a safeguard against financial meltdown; that is why gold and Treasury bonds can do well at the same time. If he is right, we will all be melting down our wedding rings before long.
Personally I believe gold is a good investment, but anyone who puts all their eggs in in one basket is cruising for a bad day.
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