Issue: 78
Sent: 29-05-2007 11:01:09
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Gold: Not Such A Good Investment - John A Robertson
The gold market has not been an attractive place for investors. Amidst the so-called booming conditions for mining companies, the gold price remains a laggard.
There has been some recent strengthening. At US$670 an ounce, the gold price is some 150% higher than at its nadir in 1999 but not much higher than a year ago when it topped $670 for the first time in over 25 years.
While an impressive longer term increase by some standards, the upturn has been weak by the standards of other refined metal products. Copper prices, for example, have risen sixfold from their cyclical low point. Nickel prices are thirteen times what they were in the mid 1980s.
The performance of gold is often judged against two key benchmarks: inflation and oil. These are connected. During periods of rising oil prices, inflation has also tended higher and gold had been regarded as a hedge against the erosion in wealth which the higher inflation implied.
The usefulness of gold, in this context, was particularly apparent in the 1960s and 1970s when restrictions on international capital flows were considerably greater than they are today. Capital restrictions meant a limited range of choices for how people could hold their savings.
Today, virtually anywhere in the world, people of wealth have a choice of anything from U.S. securities to Levi jeans as a way of securing their savings. It is up to them to decide and gold, consequently, has many competitors for its historical role as a store of value.
The collapse of impediments to international capital flows has killed off some of the investment attractiveness of gold. Another important influence on its changed role has been the success of central banks around the world, notably in the USA, in corralling and reducing inflation expectations.
Lowered expectations mean less demand for assets offering protection against the wealth eroding potential of inflation.
Against this background, the purchasing power of gold had fallen to near record low levels when measured in terms of crude oil, as the chart at http://www.thebigpicture.com.au/atc/goldvalue.htm illustrates. In March, an ounce of gold would have been enough to purchase 10.8 barrels of crude oil. As the chart shows, this was only a third of the purchasing power it had for much of the 1980s.
Similarly, much of the recent gold price increase has only just caught up with inflation over the past 15 years. As the second chart shows, adjusted for U.S. inflation, the gold price in March was only around the levels which had prevailed in early 1990.
The gold “bulls” will say that these conditions are pregnant with potential. For them, they are symptoms of a prospective price explosion as gold prices catch up to the movements in other metals.
On the other hand, more bearish analysts and commentators see this optimism being based on some flimsy evidence rooted in earlier times when the Soviet Union was a military and economic power and some governments thought autarky was a soundly based policy. To them, since these are assumptions to be permanently discarded, there are continuing reasons for gold to produce relatively poor returns.
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