MARKETS & INVESTING
Can the gold rush continue ?
Gold prices keep breaking to new alltime highs . Costing around $ 2,000 per ounce in January it surged past $ 2,750 in October this year .
Jim Kean
Chief Economist , Tatton Investment Management
Gold has not climbed this quickly since the late 1970s – a period of high inflation and global risks . Since gold is talked of as the classic ‘ safe haven ’ asset , some suggest its rise portends broader financial , economic or geopolitical risks , but this is at odds with a relatively benign economic outlook . Gold ’ s old dynamics no longer seem to apply – making it an unpredictable asset for the long-term .
The old gold models don ’ t work anymore The first odd thing about gold ’ s surge is that it is happening when global inflation is coming down – and gold was stagnant when inflation was high . Gold is often considered an inflation hedge ( because it has a low relative increase in stock and it never deteriorates ) so that correlation should be the other way around . It can be said that gold prices are climbing now as a delayed reaction to the extraordinary liquidity injections , and subsequent inflation spike , of the pandemic . However , the current price rise does not make much sense : economic growth looks set to rebound , and investor risk appetite is generally pretty strong . Gold is best thought of as a sort of currency , but one with an unsurpassed history as a store of value when risks are high . Gold is not as useful a medium of exchange as everyday ' fiat ' currencies , but it does well when people lose trust in the pound , dollar or yuan . It is hard to value , because it depends on a broad range of risk perceptions , but one way of valuing it is by comparing gold to the amount of stable fiat currency in circulation . Since the US dollar is the world ’ s reserve currency , some economists measure gold ’ s value relative to the available risk-free return on dollars . In simple terms , this means people buy gold when the economy is struggling , and assets which give a return in dollars when the economy is growing and it is this relationship that has currently broken .
48 | the adviser