Outlook: Don't worry; the gold price means nothing
Thursday 08 January 1998
Right now, the price of gold depends very much on your location. This is because gold is denominated in dollars and over the past year, the dollar has been one of the world's strongest currencies. The US might like to think of itself as the centre of the world, but in terms of population, it's nothing special. If you happen to live in South Korea, Thailand or Indonesia, the price of gold is not at a new low at all; in local currency terms it is in fact at an all time high.
Furthermore, outside the US and Europe there is a radically different view of the intrinsic value of this strangely behaving metal. In India, the largest buyer of bullion last year, runaway demand for gold is in part being caused by the fear that the Indian Rupee might go the same way as the Korean Won. In this country at least, the ancient attributes of gold as something that holds its value through thick and thin still very much hold good.
As it does too in countries where banks have come to be seen as unsafe places to hold your cash. In South Korea, gold has performed better than almost any other investment, proving its credentials beyond any doubt as a safe haven in times of trouble. Moreover, even if it were possible to buy dollars with Korea Wons, most Koreans have grown wary of anything that needs to be held in something as unreliable as a bank.
So here we have a very different view of gold, one that continues to view it as a reliable store of value. Precisely what is causing it to drop in dollar terms right now is certainly a curiosity. Demand for gold last year reached an all time high and there is evidence that the low gold price might cause a contraction in supply as mines are mothballed or closed. Theoretically, the price should be rising. Against this, however, is the continued threat of large scale gold sales by central banks from reserves. That's caused a collapse in sentiment and prompted many traders to take out short positions.
Longer term there is no reason to believe the gold price will continue plummeting into the depths. Those who take this view do so largely on the grounds that because the gold price has done well in inflationary times, it must correspondingly do badly if prices are falling. Wrong. Apart from anything else, gold is not on the evidence a particularly good hedge against inflation. Its real - that is, inflation-adjusted - price has been gently falling for the past 20 years.
Nor would it be right to view its present, relatively low, dollar price as a clear deflationary signal. Gold is quite unlike most other commodities. Its purpose is often a purely decorative one. Elsewhere in the commodities markets, there isn't much evidence of deflation. And in any case, commodity prices rarely make good forward indicators. If you are not holding gold, don't worry about it. The collapse in its dollar price means nothing at all.
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