All the gold in the world
In the Business Times dated 10 Oct 2007:
"Gold a bad inflation hedge"
Investors who buy into the idea that gold is the ultimate insurance against geopolitical risk and protection during periods of turmoil may as well believe in the tooth fairy.
Why?
1) Gold price was US$850 an ounce in Jan 1980. If this had kept pace with US inflation as measured by the Consumer Price Index, gold should be selling for $2,119.84 now. Instead, it was US$732.05 last week.
2) The price of gold rises and falls with inflation expectation 36% of the time.
3) The relationship between gold and US consumer-price inflation is less, at only 23%.
Investors looking for protection from inflation would have done better by investing in equities.
Political risk-related inflationary expectations also had no lasting impact on gold prices. Bullion was selling at US$276.25 an ounce on Aug 31 2001, less than 2 weeks before the Sept 11 attacks. After rising to as high as US$295.10, it was back at US$274.25 by Oct 23 that year.
The introduction of Treasury Inflation Protected Securities in the US and similar products in other countries also negated the need to use gold as an inflation hedge. These are basically US Treasury bonds whose principal increases at the same rate as the CPI.
What's more, inflation isnt a problem currently, even though the Fed cut its rate last month. Meanwhile, traders are betting there's a 70% chance of a further rate cut.
In sum, bullion has no direct link to economic growth as do other commodities, does not earn a return, offers limited hedging advantages and has not kept pace with inflation. Moreover, the world's biggest holders of gold, the central banks, are not overly eager to keep owning it.
"Gold a bad inflation hedge"
Investors who buy into the idea that gold is the ultimate insurance against geopolitical risk and protection during periods of turmoil may as well believe in the tooth fairy.
Why?
1) Gold price was US$850 an ounce in Jan 1980. If this had kept pace with US inflation as measured by the Consumer Price Index, gold should be selling for $2,119.84 now. Instead, it was US$732.05 last week.
2) The price of gold rises and falls with inflation expectation 36% of the time.
3) The relationship between gold and US consumer-price inflation is less, at only 23%.
Investors looking for protection from inflation would have done better by investing in equities.
Political risk-related inflationary expectations also had no lasting impact on gold prices. Bullion was selling at US$276.25 an ounce on Aug 31 2001, less than 2 weeks before the Sept 11 attacks. After rising to as high as US$295.10, it was back at US$274.25 by Oct 23 that year.
The introduction of Treasury Inflation Protected Securities in the US and similar products in other countries also negated the need to use gold as an inflation hedge. These are basically US Treasury bonds whose principal increases at the same rate as the CPI.
What's more, inflation isnt a problem currently, even though the Fed cut its rate last month. Meanwhile, traders are betting there's a 70% chance of a further rate cut.
In sum, bullion has no direct link to economic growth as do other commodities, does not earn a return, offers limited hedging advantages and has not kept pace with inflation. Moreover, the world's biggest holders of gold, the central banks, are not overly eager to keep owning it.
posted by Ming at 2:55 PM
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