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 Should we question whether the gold is a safe-haven assets, hedge against inflation, insurance policy against geopolitical risks or protection during periods of financial-market turmoil. The specter of political risk is ever present, Federal Reserve's response to the credit crisis by cutting the federal funds and discount rates, the emphasis on gold's value has lately focused on market dislocations and inflation. For many investors believing in such a suppositions might translate in the tooth fairy.
Here's why. Gold reached a record high of $850 an ounce in January 1980. If since then the spot price of bullion kept pace with U.S. inflation as measured by the consumer-price index, gold would now be selling for $2,119.84. Instead, only about a third of what it should be if it were truly an effective inflation hedge. History shows that since 1988, the correlation between bullion and U.S. inflation expectations is just 36 percent, according to Goldman Sachs Group Inc. That means the price of gold rises and falls with inflation expectations 36 percent of the time. The relationship between gold and U.S. consumer-price inflation is less, at only 23 percent. And the metal's correlation with U.S. core inflation, which excludes food and energy costs, is even lower, at 7 percent. In fact, the gold appears out of sync: there are few instances in the past 20 years when gold has moved in sync with either core or headline inflation.
Investors seeking protection from inflation would have been better off in the U.S. stock market.
On Jan. 30, 1980, the Standard & Poor's 500 Index stood at 115.20. Adjusting the index to compensate for the increase in the CPI since then would put it at 287.30 today. Yet on Oct. 3, the S&P 500 closed at 1539.59, more than five times the inflation-break-even level.
As for political risk, the inflationary expectations associated with the Sept. 11 terrorist attacks
on the U.S. -- arguably the most dire threat to American security since the 1962 Cuban Missile Crisis, or even World War II -- had no lasting impact on the price of gold.
Sept. 11 effect, for instance, showing that gold was selling at $276.25 an ounce on Aug. 31, 2001, less than two weeks beforethe attacks; after rising to as high as $295.10, bullion was back at $274.25 on Oct. 23.
Gold has been on a roll, and is on course to rally for the seventh consecutive year. Behind its rise has been the abundance of global liquidity and, more recently, the Fed's relaxed monetary policy and weaker dollar.
Bullion has also benefited from strong jewelry demand in emerging-market countries such as
China and India; shrinking global mine production, especially in South Africa; reduced net central bank gold sales; and the growth of gold exchange-traded funds, which make it easy for individuals to invest in gold and which have $17.7 billion in assets, according to Morgan Stanley.
This shows the gold may be a poor hedge, it isn't necessarily a lousy investment. ``
Nonetheless, bullion has no direct link to economic growth as do other commodities,
doesn't earn a return, offers limited hedging advantages and hasn't kept pace with inflation. Moreover, the world's biggest holders of gold, major central banks, aren't overly eager to keep owning it.
For investors who hold gold the questions remain whether Is the gold a bad hedge and questionable investment?
Welcome your comments!
"The dogmas of the quiet past are inadequate to the stormy
present" (Abraham Lincoln).
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