Good As Gold: Economic Commentary

Good As Gold

Throughout the financial crisis, recession and slow recovery, nothing has shined more than the price of precious metals led by gold. Gold began the last decade at less than $300 per ounce and ended the decade near $1,000 per ounce. Now, less than two years later, the price has broken the $1,500 barrier. Even though the stock market has gained over 50% during the recovery, we must remember that the stock market lost 50% of its value during the financial meltdown in 2008. Looking long-term, stocks have gained approximately 10% over the last five years while gold has more than doubled. The question is, why is gold so hot? There are two explanations which shed light on our economic situation. First, gold is seen as a hedge against inflation. When the threat of inflation is high, the price of gold should do well. Well, we certainly have not had rampant inflation during the past five years and at first blush this explanation does not seem to make sense. However, keep in mind that many market observers feel that inflation is knocking at the door and they cite as evidence the debt our government has piled up and rising energy prices. If we don’t deal with our debt and if oil prices keep rising, inflation indeed could appear as the next major threat to our economy. That is why the debt negotiations going on right now are so important.

There is another factor in which the economy can cause gold prices to rise. This factor is the threat of economic calamity. Gold has always been a safe haven, just as U.S. Treasuries have been. Well, the financial meltdown of a few years ago was a major reason for gold prices to be hot. If the economy did not recover and the banking system collapsed, those predicting doom would have had a field day because gold would have ruled the earth. This scenario did not happen and government intervention was a big part of the reason why. However, certainly the world is not clear of economic threats. We continue to see Europe dealing with its own crisis and this is affecting the markets on almost a daily basis. In summary, gold has been able to play “both sides of the coin” (excuse the pun). When the crisis threatened and deflation could have been a result, gold did well. If the economic recovery continues and this brings the threat of inflation because demand for resources climbs, gold does well. What happens if the recovery stays slow but it is strong enough that we stay out of trouble? Could gold finally fall out of favor? The proponents of gold argue that it can’t happen. But we know that you can’t predict the future, so we will not go there. The important point to note is that gold is more than a precious metal. It is a barometer for how the economy and the markets are doing. Following gold is for more than speculators, it is for those who are looking for signs of the “winds of change” (oops another pun).

Watch for the employment reports this week as an indicator of where we are going.

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