Gold is in style these days. The price of the yellow metal reached an all-time peak of $882 (Rs34,663) on Thursday. Another Asian growth story? Not really. The gold price is rising because worried investors are turning to the ultimate inflation hedge.
Oil is sometimes called black gold, but the two commodities follow different patterns. Demand for both increases when economic growth is strong—oil fuels growth and gold jewellery is one of its rewards. The response to price increases differs, though. Oil is vital—transport and energy needs have to be met somehow—so its use doesn’t drop much in the face of higher prices.
Conversely, price has a big effect on jewellery purchases. Flat local prices in the last year spurred a rapid increase in “bling” demand in China, India, West Asia and Russia. But the dollar price was 57% higher in the first three quarters of 2007 than two years earlier—and jewellery demand was down.
Gold jewellery is a sign of wealth, but gold investment is a sign of monetary fear. So the best explanation of the 35% increase in the gold price since August is investor concern that cuts in interest rates in the US and UK might eventually lead to much higher inflation.
True, bond yields are still low, but it looks like some investors don’t quite trust the bond market. Sales of gold exchange traded funds, an easy way to bet on the gold price, have been rising fast. The gold volume held in trust at StreetTRACKS Gold Shares increased by 38% in the last six months.
Since the last price peak in 1980, investors have generally been gaining confidence in the ability of central banks to keep inflation under control. That now seems to be changing, with good reason. Monetary authorities seem much more concerned to promote growth than to ensure price stability.
The recent gold price surge sounds like a fire bell in the night—a warning of a serious inflation problem ahead.