To The Rescue

16/09/2011 at 1:52 pm

To be fair, equity markets had been creeping higher all week and were already up on the day. Bonds had nudged lower. Colour was beginning to return to the markets’ cheeks. But the announcement yesterday that the ECB and the Fed (and the Bank of England, Bank of Japan and Swiss National Bank) were joining forces to prevent a squeeze on dollar funding to eurozone banks turned cautious hope into outright relief. On top of the Franco-German statement of continued support for Greece on Wednesday, it looked as though the cavalry were riding to the rescue at last.

As it happens, of course, the cavalry joined the fray a while ago. Europe’s problems – and fears for the global economy at large – have dominated the political and financial agenda for some considerable time. If the world’s traders, journalists, economists etc. can see something, so can its leaders. The banking crisis, and other major crises before it, occurred because too many people had taken their eye off the ball and believed all was well. In fact, most participants in and observers of the doomed subprime and structured credit markets thought that they and their products were the cat’s whiskers and that anyone who disagreed was an idiot.

Such is the way of booms and bubbles; such has hardly been the way with Greece and its attendant concerns.

And yet there is one corner of the financial world where unbridled optimism remains the order of the day.

According to a report out yesterday from a firm of metals analysts, gold is going to hit $2,000 an ounce this year on the back of record investor demand. “Where else do you park your money?”, asked one of its authors.

Nonsense, says a strategist at SocGen. A miserly two thousand bucks an ounce? The fair value of gold is actually over ten. (This insight was based on dividing the size of US gold reserves into a monetary aggregate. As well as the concept one could also criticise the particular aggregate used as it happens, but life is short.)

This blog has long been sceptical of gold. A hedge against a falling dollar that also went up as the greenback rose; a hedge against inflation that continued to rally as annual CPI turned negative – heads you won, tails you couldn’t lose. Even the language – “park your money” – reveals a psychology insouciant in the face of the exceptionally high volatility associated with investment in commodities. (Rather than leaving your car in a nice car park, trading metals is more like strapping it to a giant rollercoaster.)

And of course, this blog has been wrong: gold has continued to rise – and rise, nearing the $2,000-per-ounce territory it last (briefly) held in early 1980 (in today’s dollars). “Just look at the money I’ve made,” a critic of the bear view might reasonably reply. “You’re an idiot.”

Such is the way of things. But should demand wane, where will support come from? The world needs a financial system. We still need banks, and credit. That’s why the cavalry have appeared: there are some battles that have to be won.

Who needs gold?


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