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Gold and commodities: the not so precious metal Gold and commodities: the not so precious metal
(6 months later)
The "barbarous relic" is how Keynes referred to gold, and recent buyers of the stuff might not be too well disposed to it either. Over Friday and Monday, gold suffered its biggest plunge in value in 30 years. At one point on Monday, the market price of a troy ounce dropped by over $30 in just a few minutes. Even after a mild recovery yesterday, at $1,363 an ounce, the not so precious metal remains more than $200 below where it began on Friday.The "barbarous relic" is how Keynes referred to gold, and recent buyers of the stuff might not be too well disposed to it either. Over Friday and Monday, gold suffered its biggest plunge in value in 30 years. At one point on Monday, the market price of a troy ounce dropped by over $30 in just a few minutes. Even after a mild recovery yesterday, at $1,363 an ounce, the not so precious metal remains more than $200 below where it began on Friday.
Why the plunge? Very few of the explanations are especially persuasive. A slowdown in China (which is a major buyer of commodities)? Hardly news. Ditto the signs of a (very) mild pickup in the US. As for the reports that the central bank of Cyprus will cash in 10 tonnes of its gold holdings to pay for its economic and fiscal crisis, that sale – while noteworthy by recent European standards – would be of only 0.2% of the world's reserves. The more accurate explanation may be the most prosaic: that after hitting an all-time peak of $1,920 an ounce in September 2011, gold has simply gone up far enough in price for holders to start selling it. Even before the turbulence of the past few days, it had already been heading south. Much the same could be said of many other commodities that have been falling over the past few days. Which leads us to an intriguing irony.Why the plunge? Very few of the explanations are especially persuasive. A slowdown in China (which is a major buyer of commodities)? Hardly news. Ditto the signs of a (very) mild pickup in the US. As for the reports that the central bank of Cyprus will cash in 10 tonnes of its gold holdings to pay for its economic and fiscal crisis, that sale – while noteworthy by recent European standards – would be of only 0.2% of the world's reserves. The more accurate explanation may be the most prosaic: that after hitting an all-time peak of $1,920 an ounce in September 2011, gold has simply gone up far enough in price for holders to start selling it. Even before the turbulence of the past few days, it had already been heading south. Much the same could be said of many other commodities that have been falling over the past few days. Which leads us to an intriguing irony.
Ever since the crisis broke out, a vocal minority of investors have used gold as a critique of western economic-rescue policies. All those billions pumped into moribund economies in Britain and the US and Japan; all those many-phased quantitative-easing programmes by central banks; the general debauchment of currencies, so that the pound is now worth around 20% less than it was when RBS and Lloyds-HBOS fell over – an argument wheeled out over and over is that all this semi-Keynesian loucheness is bound to produce the mother of all inflationary booms, and the best insurance against that is gold. Or that newer virtual means of exchange, Bitcoin. Or anything, really, as long as it's not fiat currency. It's a strain of argument used by shrink-the-staters; and it has long seemed more grounded in ideology than empirical reality.Ever since the crisis broke out, a vocal minority of investors have used gold as a critique of western economic-rescue policies. All those billions pumped into moribund economies in Britain and the US and Japan; all those many-phased quantitative-easing programmes by central banks; the general debauchment of currencies, so that the pound is now worth around 20% less than it was when RBS and Lloyds-HBOS fell over – an argument wheeled out over and over is that all this semi-Keynesian loucheness is bound to produce the mother of all inflationary booms, and the best insurance against that is gold. Or that newer virtual means of exchange, Bitcoin. Or anything, really, as long as it's not fiat currency. It's a strain of argument used by shrink-the-staters; and it has long seemed more grounded in ideology than empirical reality.
Take that old saw about gold being an ideal protection against rising inflation. Over the very long term, true. Over any other timeframe, equities are just as effective a hedge. But in any case, after nearly £400bn of Bank of England cash, this Weimar-style hyperinflation has yet to turn up. Which leaves us with the irony: that those who spurn sterling as being too easily debased in value have themselves invested in an asset that has no easily appraisable value. How much a gold bar is worth is really down to whatever a buyer and seller agree it's worth. It's an asset, not an inviolable store of wealth – whatever the goldbugs say.Take that old saw about gold being an ideal protection against rising inflation. Over the very long term, true. Over any other timeframe, equities are just as effective a hedge. But in any case, after nearly £400bn of Bank of England cash, this Weimar-style hyperinflation has yet to turn up. Which leaves us with the irony: that those who spurn sterling as being too easily debased in value have themselves invested in an asset that has no easily appraisable value. How much a gold bar is worth is really down to whatever a buyer and seller agree it's worth. It's an asset, not an inviolable store of wealth – whatever the goldbugs say.
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