Gold has such strong cultural resonance – from Midas to Goldfinger – that it is hard to regard it rationally. And so when the price soars, or plunges, there is a temptation to try to extract some grand message for humankind: what is the plunge saying about the state of the world economy?
Well, maybe nothing. Gold is a market just like any other, in the sense that it is driven by supply and demand. But it also a mirror in that it reflects the hopes and fears of human beings. Changes in the balance between hope and fear lead to swings in demand. Because supply is pretty much fixed, quite small shifts in that balance can therefore have a disproportionate impact on the price.
That is the best explanation for what is happening now. Four or five years ago, as the banking crisis unfolded, fears mounted that the authorities would be unable to cope. Even sophisticated investors became frightened and gold is where money runs when it is scared. The result was an extraordinary spike in the price. In the autumn of 2008, it was less than $800 an ounce; by September 2011, more than $1,800. People got rather carried away. A second, slightly lower peak last autumn led Bank of America Merrill Lynch (BAML) to take an even more bullish stance.
“Ultimately, we think gold can trade between $3,000 and $5,000 an ounce,” MacNeil Curry, that head of foreign-exchange and rates technical strategy at BAML, told CNBC on 21 September last year.
Well, that seems rather off-key now but it reflected a common view at the time. The Federal Reserve was printing money almost without limit and, sooner or later, that was bound to end up leading to more inflation. In a world where paper money is increasingly distrusted, the obvious safe haven was gold.
Since last autumn, three main shifts in mood have taken place. One has been the growing conviction that the US economic recovery is secure. So US equities have sustained a solid recovery, one that holders of other assets, including gold, have rather missed. The second is that Chinese growth has shaded back, and that puts less pressure on commodity prices in general. Gold is a commodity, albeit an unusual one. And the third shift is that, so far at least, there has been no pickup in inflation worldwide; actually, rather the reverse, because the J P Morgan index of global inflation peaked at 4 per cent in 2011 and is now down to 2.5 per cent.
So what can one sensibly say about gold now? The best anchor is the long, historical perspective. Gold, like all markets, has had peaks and troughs, but if you look at the price in real terms (ie adjusting for inflation) over the past century, there is a very broad market range of $300 to $800 an ounce in today’s money. Thus, at the beginning of 1915 the inflation-adjusted price was around $450. It peaked at $600 in the early 1930s, a function of falling prices in the US. In the 1950s, it was around $300, until the runaway inflation of the 1970s led to a new peak. In today’s money, the price was nearly $2,000 an ounce in early 1980. The return to monetary discipline brought it back down to around $350 by 2000, then it shot up again, just about reaching the late 1970s peak in 2011.
Yesterday, gold was $1,380 an ounce so, on this historical view, it has a lot farther to fall before it gets back into its long-term range. Of course, this is just an observation, not a prediction, and, on past experience, the return to its range could take 10 years. Meanwhile, though, we should remember that high gold prices have been associated with economic unrest, and low prices with calm and prosperity. So what has happened deserves a cautious welcome.