The crash in the gold price isn’t all bad. In fact, it may even be a sign of recovery

Gold is where money runs when it's scared. That's what we found in the autumn of 2008, when the banking crisis unfolded

Share

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.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Recruitment Genius: Finance Director

£65000 - £80000 per annum: Recruitment Genius: Finance Director required to jo...

Recruitment Genius: Medico-Legal Assistant

£15000 - £25000 per annum: Recruitment Genius: This is a unique opportunity fo...

Ashdown Group: (PHP / Python) - Global Media firm

£50000 per annum + 26 days holiday,pension: Ashdown Group: A highly successful...

The Jenrick Group: Quality Inspector

£27000 per annum + pension + holidays: The Jenrick Group: A Quality Technician...

Day In a Page

Read Next
Should parents be allowed to take pictures at nativity plays?  

Ghosts of Christmas past: What effect could posting pictures of nativity plays have on the next generation?

Ellen E Jones
The first Christmas card: in 1843 the inventor Sir Henry Cole commissioned the artist John Callcott Horsley to draw a card for him to send to family and friends  

Hold your temperance: New life for the first Christmas card

Simmy Richman
The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

The 12 ways of Christmas

We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
Birdwatching men have a lot in common with their feathered friends, new study shows

The male exhibits strange behaviour

A new study shows that birdwatching men have a lot in common with their feathered friends...
Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

Famous diaries: Christmas week in history

Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
From noble to narky, the fall of the open letter

From noble to narky, the fall of the open letter

The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

A Christmas ghost story by Alison Moore

The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'
Marian Keyes: The author on her pre-approved Christmas, true love's parking implications and living in the moment

Marian Keyes

The author on her pre-approved Christmas, true love's parking implications and living in the moment
Bill Granger recipes: Our chef creates an Italian-inspired fish feast for Christmas Eve

Bill Granger's Christmas Eve fish feast

Bill's Italian friends introduced him to the Roman Catholic custom of a lavish fish supper on Christmas Eve. Here, he gives the tradition his own spin…
Liverpool vs Arsenal: Brendan Rodgers is fighting for his reputation

Rodgers fights for his reputation

Liverpool manager tries to stay on his feet despite waves of criticism
Amir Khan: 'The Taliban can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'

Amir Khan attacks the Taliban

'They can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'
Michael Calvin: Sepp Blatter is my man of the year in sport. Bring on 2015, quick

Michael Calvin's Last Word

Sepp Blatter is my man of the year in sport. Bring on 2015, quick