Gold Rush

24/09/2010 at 11:25 am 1 comment

On Tuesday afternoon, the Fed gave a statement which left the door open to further quantitative easing in the US. The dollar sold off in response and so the price of gold in dollars rose to another new record high.

So far, so reasonable sounding. The dollar has weakened by about 3% on a trade weighted basis over the last month, and gold has risen by about 4%.

There is only one problem. Over the first half of this year, the trade weighted dollar strengthened by about 5%. And gold? It went up by 10%.

It seems that in the current bull market for the metal, it’s heads you win, tails you don’t lose. Attempts to explain the behaviour of the gold price by reference to the strength of the dollar fail in the face of the facts. Likewise any effort to attribute gold’s strength to inflation, which in the US is hovering at around 1% p.a. – and whose low level is responsible for worrying the Fed in the first place. And if there’s no inflationary or devaluationary rationale for buying gold, then what’s the point? Like any commodity it yields nothing and will actually cost you money if you physically want to own it.

Gold has to be one of the biggest market bubbles around, being driven ever higher on speculative froth and spurious explanations. Admittedly this seems to be a minority view – “gold bubble” gets a mere 6 million hits on Google as opposed to 38 million for “gold fund“. Either way: how much further can the price go?

In today’s money, gold was worth more in US$ back in the early 1980s than it is now – but not for long. The inflation-adjusted price peaked at over $1,800 in early 1980, having tripled over the previous two years, before losing two thirds of its value again over the next five. The price today is touching $1,300 – almost exactly quadruple the $326 reached at the bottom nine years ago.

When you consider that during the 80s gold spike inflation in the US was running in double digits, peaking at an eye-watering 14.8%, and that today the metal is well on the way to equalling its performance back then while some commentators are still worring about deflation .. In the words of Lord Byron, a “thirst for gold” right now may well turn out to be a “beggar’s vice”.

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  • 1. The Year In View « The Blog @ Vigilant Financial  |  20/12/2010 at 2:53 pm

    […] matched by the Bloomberg Base Metal index. Precious metals continued their staggering run into precarious territory, with gold 26% higher and silver up an astonishing 73%. One of the few fallers was a significant […]

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