Gold, Inflation, Other Factors!
If you own physical gold, or are considering owning it, you ought to read Michelle Smith's article Gold: The Ultimate Hedge?(Reading time: 4 minutes, thinking time longer). A balanced article on physical gold, this April 11, 2012 article questions whether physical gold is indeed "the ultimate inflation hedge".
In essence, the article says:
- one reason investors purchase gold is because it is considered a hedge against inflation;
- in its 2012 Investment Returns Yearbook, Credit Suisse Global says gold "can fail" and there's history to prove it;
- finding assets that protect purchasing power is the primary reason for investors to attempt to hedge;
- Credit Suisse says that "if gold were a reliable hedge against inflation, its real price would be relatively unwavering. However, gold is volatile and its purchasing power fluctuates";
- "with gold's bull run spanning more than a decade, some investors may be unaware, some may have forgotten, or others may even deem irrelevant the metal's broader history, as it often seems that we are experiencing unprecedented economic conditions";
- Credit Suisse has reviewed data over 112 years and for 19 countries that "brings time passed back into focus and reacquaints investors with the reality that gold has not always traveled up";
- Over that 112 year period, the real return on gold measured in British pounds was 1.07%;
- "in 60% of the episodes when inflation surprised to the upside in the post-World War II period, gold has underperformed inflation"; and,
- Nouriel Roubini, the widely quoted New York University economist, has warned that gold prices only rise (1) when inflation is high and rising, and (2) when there is fear of 'near depression' and investors fear for fiat currency security.
I consider this to be a much 'better than average' article on physical gold price because it reports, doesn't take positions, and leaves the reader to consider whether he/she ought to amend his/her thinking about physical gold and its ownership.
My own thoughts having read this article are that there is little doubt:
- currently (and for the past several years) pundits continuously push the view that 'there is going to be high inflation going forward, and that will push the physical gold price higher, and in the case of some of those pundits, much (and maybe 'much, much') higher;
- where some pundits have been for some time forecasting high (and in some cases 'hyper') inflation, particularly in the United States, that has not as yet occurred, even as U.S. Cumulative National Debt has spiraled and spirals out of control; and,
- the price of physical gold denominated in U.S.$ has continued to trend upward since 2001, so there clearly are factors other than 'actually experienced' inflation at work that have positively impacted the gold price.
And that said:
- the current market price of physical gold may very well be 'pricing in' some of the pundits enthusiastic and repetitive views that 'high (or hyper) inflation is on its way, and it is just a matter of time when it 'strikes the U.S.$ with a vengeance';
- the comment in the article that:
"some investors may be unaware, some may have forgotten, or others may even deem irrelevant the metal's broader history, as it often seems that we are experiencing unprecedented economic conditions"
has to be important. That said, unprecedented may be a strong term, as dramatic negative economic events have periodically been experienced in the past. A better way of putting it is:
'abnormal economic conditions in the developed countries as measured against economic conditions in those countries experienced in the last half of the 20th century',
Current economic uncertainty has to be impacting the gold price, and has to be being continually priced into the gold market as current economic conditions continue to evolve;
- my previous comment ties into the second 'gold price rise' criteria cited by Roubini, being that "gold prices rise when there is fear of 'near depression' and investors fear for fiat currency security"; and,
- trades in physical gold 'paper' - which paper in circulation is estimated by some to be as much as 100X the 'paper value' of the world's entire above-ground physical gold store - impact the day/day price of physical gold in a manner that confuses analysis of the day/day gold price.
There are no sure answers to whether from here the price of gold trends higher or lower, or to what higher or lower price levels. The only certain thing about the price of physical gold is that, like everything else, there is uncertainty attached to it - and that conditions affecting it in the current economic environment can change every day for better or worse as world and country specific events unfold in ways that that influence world and country specific economic risk.