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

Qualified Primary Teaching Assistant

£64 - £73 per day + Competitive rates based on experience : Randstad Education...

Primary KS2 NQTs required in Lambeth

£117 - £157 per day + Competitive London rates: Randstad Education Group: * Pr...

Primary NQTs required in Lambeth

£117 - £157 per day + Competitive London rates: Randstad Education Group: * Pr...

Primary NQTs required in Lambeth

£117 - £157 per day + Competitive London rates: Randstad Education Group: * Pr...

Day In a Page

Read Next
Piper Ryan Randall leads a pro-Scottish independence rally in the suburbs of Edinburgh  

i Editor's Letter: Britain survives, but change is afoot

Oliver Duff Oliver Duff
Some believe that David Cameron is to blame for allowing Alex Salmond a referendum  

Scottish referendum: So how about the English now being given a chance to split from England?

Mark Steel
Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam