Bullion Bulls
By The Economist
A weak dollar explains gold’s rise.
 Gold fascinates investors. The latest surge in bullion—nominal prices this week topped $1,050 an ounce, a record—has generated headlines that would not have been seen if nickel had reached a new peak.
That is because gold was once the linchpin of the global monetary system and is still seen by many as a hedge against inflation. But if investors are really frightened of price rises, it is hard to see evidence in the government bond market. There has been a modest pickup in inflation expectations (measured by the difference between the yield on inflation-linked bonds from that on conventional bonds). But the Treasury bond market is only pointing to average inflation of 1.9% over the next 20 years.
Other explanations for gold’s rise are even harder to credit. Some reports cited this week’s rise in Australian interest rates, a classic case of the post hoc ergo propter hoc fallacy (just because one event occurred first, that does not mean it caused the second). Theories of supply and demand do not work, either. Mining production is slightly up year on year; jewellery demand is down by 13.8%.
That leaves the dollar as 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.
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. He says investors see gold as a hedge against the depreciation of paper currencies, a hedge which has little opportunity cost because of low interest rates. If he is right, we will all be melting down our wedding rings before long.
Courtesy of The Economist
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Weekly Commentaries |
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