Gold is
the new
global
currency,
Financial
Times
resentfully
admits
|
|
Submitted by cpowell on
05:31PM ET Monday,
January 7, 2008.
Section:
Daily Dispatches
Gold Is the New
Global Currency
From the Financial
Times, London
Monday, January 7, 2008
http://www.ft.com/cms/s/0/301c112e-bd51-11dc-b7e6-0000779fd2ac.html
There was a time when
gold was money. In
today's uncertain world,
the yellow metal is back
in fashion. Bullion
prices rose to a record
nominal high after the
assassination of Benazir
Bhutto in Pakistan added
to nervousness about the
world economy. Part of
gold's allure is its
traditional status as a
safe haven. It is seen
as a store of value when
everything else seems
risky. But the bigger
drivers behind the
rising spot price are a
depreciating dollar and
the prospect of negative
US real interest rates.
A better way to think
of gold may be as
central bankers used to
before America dropped
the gold standard: not
as a commodity, but as
another currency. As
long as the dollar stays
weak, gold's bull run
will last.
The arguments for
further gains in the
gold price are
compelling. It looks
cheap, despite climbing
from a low of about $250
a troy ounce in 1999,
when central banks were
selling reserves. The
UK's decision back then
to sell 60 per cent of
its official holdings
looks particularly poor
judgment.
Prices have a long
way to go before they
approach the
inflation-adjusted
record touched in 1980
when Soviet tanks
invaded Afghanistan. At
Monday's $859, gold was
trading at less than
half that level. It
could top $1,000 and
still be at the lower
end of what some
analysts argue is a safe
haven range.
Gold is also
benefiting from
diversification away
from equities.
Commodities have emerged
as a distinct asset
class, with billions of
dollars poured into
exchange traded funds.
Physical demand for
jewellery may have
stalled in Asia, but
consumption remains
strong in the Middle
East. Declining output
in South Africa will
help support spot
prices.
But it is the
relationship between the
dollar and the reaction
of the world's central
banks to the credit
squeeze that some bulls
would say really makes
gold an attractive bet.
The US Federal
Reserve's aggressive,
rate-cutting response to
the credit squeeze has
created a risk of a
sharp rise in American
inflation. That in turn
creates the risk of a
precipitous fall in the
dollar and so makes gold
more attractive as a
hedge.
The world's major
economies have
experienced rapid money
supply growth of 10 per
cent plus per annum in
recent years. The Fed
remains the world's
biggest holder of gold,
yet supplies of the
metal are no longer
growing annually. If
gold is a finite
currency, its value
against not just the
dollar, but sterling and
the euro too should
rise.
Moreover, a sharp
decline in US real
interest rates --
financial markets expect
another half percentage
point cut this month --
means that the low yield
on gold matters less. It
may have been a poor
hedge against inflation
in the past but the
combination of rising
consumer prices and
economic stagnation may
make it a better store
of value.
Gold's rise shows
investors are nervous.
That is an important
message for central
banks contemplating
interest rate cuts. The
Fed must show it is not
prepared to allow
inflation to take off.
Keynes called gold a
barbarous relic. It has
life left in it. But it
is in the interests of
business and consumers
that its most bullish
fans are proved wrong.
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