Gold has risen from $255 an ounce in April 2001 to $480 an ounce, near a 17-year high. -- But it's not quite clear why. -- On Tuesday, Philip Coggan of the Financial Times speculated about why gold has, rather mysteriously, been "breaking higher against most major currencies" in 2005. -- Some believe that fear of financial collapse is the cause, but a piece published today in Bloomberg News also cites "demand from Indian jewellers as they enter the wedding season" as a factor. -- Most think it's more likely that inflation fears are the main factor. -- But Matt Lynn disagrees: "It just tells us there is too much cheap money floating around. The price of almost every other commodity has already exploded. It was only a matter of time before gold had its turn." -- Is such speculation per se a bad thing? -- That depends, according to an economic analysis posted in 2002 by U.C. Santa Clara Professor of Economics Fred Foldvary, which is worth reading regardless of one's opinion of the theories of Henry George (1839-1897), the 19th-century American economist who is Foldvary's chief inspiration. ...
The Short View
GOLD -- AN INVESTMENT OF LAST RESORT?
By Philip Coggan
Financial Times (UK)
October 11, 2005
http://news.ft.com/cms/s/e9951ca2-39f2-11da-806e-00000e2511c8.html (subscribers only)
When the French diplomat Talleyrand died, his Austrian rival Prince Metternich is supposed to have mused "I wonder what he meant by that?" Similarly, any sudden shift in the gold price is rarely attributed to the balance of supply and demand, but is seen as having some greater significance for economies and financial markets.
For a while, gold was simply seen as a hedge against a falling dollar, with the yellow metal making little progress in euro and yen terms. But that has changed this year, with bullion breaking higher against most major currencies.
So what might it mean? Traditionally, gold has been seen as a hedge against higher inflation, the role that it performed in the 1970s. But as Richard Cookson of HSBC points out, there has been virtually no link between inflation and gold prices in recent years, when gold hit its recent low of $255 in April 2001, U.S. core inflation was actually higher than it is now.
Of course, the markets could be anticipating higher future inflation. But if that is the case, then it has not shown up in the bond markets. The break-even inflation rate on long-dated U.S. index-linked bonds is just 2.6 per cent, hardly an indicator of panic on the issue.
The other potential use of gold is as a hedge against potential economic collapse. Gold will keep its value when all other assets are plunging in price. But if investors were worried about that scenario, one would expect to see a sell-off in risky assets, such as high yield and emerging market bonds. However, that has not happened.
So maybe the rise in the gold price has no wider significance. Some see it as simply a reflection of the supply-demand imbalance. Jewellery demand was strong in the first half of 2005 (although higher prices normally cause such demand to falter) while new production fell last year.
But another possibility, favored by HSBC's Cookson, is that gold has become a popular speculative play, particularly now that oil has lost momentum. "Speculative positions on Nymex are getting on for record highs and are almost double their level at the beginning of August" he says. Gold may thus be an investment of last resort, after all, "it is the last in a long line of asset markets to have flown to the stars" he argues.
GOLD PRICE NEARS 17-YEAR HIGH IN ASIA
By Tan Hwee Ann
October 12, 2005
Gold prices in Asia rose to near a 17-year high yesterday.
Gold for immediate delivery has rallied 12 per cent in the past three months amid rising concern that high energy prices might fuel inflation as well as demand from Indian jewellers as they enter the wedding season.
Gold for December delivery rose as much as $US2.40, or 0.5 per cent, to $US480.40 an ounce in after-hours electronic trading on the Comex division of the New York Mercantile Exchange. It was trading at $US480.20 yesterday afternoon.
Gold for immediate delivery reached $US478.92 an ounce on Monday, the highest since January 15, 1988, when it reached $US480.30, according to Bloomberg data.
Many traders and investors "feel gold can hit $US500 in the near term, propelled by solid demand for investment and jewellery as well as high energy prices and forecasts that there could be less mine production in the near future," said NM Rothschild & Sons (Australia).
Some investors buy gold in times of inflation, which erodes the value of fixed-income assets such as bonds. Gold futures surged to a record $US873 an ounce in 1980, when consumer prices rose more than 12 per cent from the previous year.
Hedge fund managers and other speculators have more than doubled their net long positions in New York gold futures in the past two months.
Speculative long positions, or bets that prices will rise, outnumbered short positions by 171,498 contracts in the week ended October 4, the U.S. Commodity Futures Trading Commission said last Friday.
In India, the world's biggest gold consumer, prices of the metal for December delivery rose 19 rupees, or 0.3 per cent, to 6,879 rupees per 10 grams, or 21,393.69 rupees ($US477 or $629) an ounce, on the Multi Commodity Exchange of India.
GOLD NEAR A 17-YEAR HIGH IN LONDON ON CONCERN ABOUT INFLATION
By Tan Hwee Ann (Melbourne) and Danielle Rossingh (London )
October 11, 2005
Gold prices in London traded near a 17-year high as gains in energy prices prompted investors to buy bullion as a hedge against inflation.
U.S. consumer prices rose the most in 14 years last month as fuel costs soared after Hurricanes Katrina and Rita, a report Oct. 14 may show. Some investors buy gold in times of inflation, which erodes the value of fixed-income assets such as bonds. Gold futures surged to a record $873 an ounce in 1980, when consumer prices rose more than 12 percent from the previous year.
Investors are buying gold "because it's a good hedge to have in your portfolio to protect against inflation," Frederic Lasserre, head of commodities research at Société Générale SA in Paris, said in a telephone interview today.
Gold for immediate delivery rose as much as $2.30, or 0.5 percent, to $477.55 an ounce. It traded at $475.46 at 9:09 a.m. in London. The metal reached $478.92 an ounce yesterday, the highest since Jan. 15, 1988.
The euro traded at $1.2020, from $1.2067 late yesterday in New York, according to electronic currency dealing system EBS. The dollar has declined 11 percent against the euro this year.
Gold may reach $500 by the third quarter of next year, Lasserre said.
"We are still quite bullish on gold," he said. "The dollar will remain weak, physical demand will remain robust and there is an increasing demand for gold from the investor community."
A weaker dollar makes gold more attractive as an alternative investment to U.S. stocks and bonds. The correlation coefficient for gold and the euro is 0.66. That measures the coincidence of closing daily gains and declines in the past year on a scale of -1, meaning prices move opposite each other, to 1, meaning they move in lockstep.
U.S. consumer prices probably rose 0.9 percent in September, the most since January 1990, the median forecast of 64 economists surveyed by Bloomberg showed. The Labor Department will release the report on Oct. 14.
Gold has gained 12 percent in three months on concern that a surge in crude oil prices will stoke inflation. Oil prices rose to a record on Aug. 30, a day after Hurricane Katrina hit the Gulf Coast.
Hedge-fund managers and other speculators have more than doubled their net-long positions in New York gold futures in the past two months. Speculative long positions, or bets prices will rise, outnumbered short positions by 171,498 contracts in the week ended Oct. 4, the U.S. Commodity Futures Trading Commission said Oct. 7.
Among other precious metals for immediate delivery in London, silver fell 7 cents, or 0.9 percent, to $7.72 an ounce. Platinum rose $3, or 0.3 percent, to $939.50 an ounce. Palladium gained $3.75, or 1.8 percent, to $208.25.
GOLD SIGNALS THE END OF THE COMMODITIES BULL RUN
By Matt Lynn
October 10, 2005
There are two commodities that stop traders from thinking straight: oil and gold.
Oil already has everyone worried about a return to the depressed 1970s. Now it is the turn of gold. In the past few weeks, the shiny, hard metal has sprung to life, raising the value of mining giants such as Anglo American Plc. At more than $470 an ounce, it is at levels unseen for almost two decades.
Whatever the financial jeremiahs may think, the gold rally isn't telling us that the global economy is about to descend into hyperinflation. Nor is it saying paper money is worthless, and people are hoarding something more reliable.
It just tells us there is too much cheap money floating around. The price of almost every other commodity has already exploded. It was only a matter of time before gold had its turn.
The increase in gold prices probably signals the end of an inflationary period, not the start. The rising price of gold looks like the last gasp of the commodities bull market.
"The prevailing view is that gold is rising because it's a hedge against some kind of financial Armageddon," said Richard Cookson, strategist at HSBC Holdings Plc in London, in a telephone interview. "Unfortunately there isn't any real evidence to support that view."
It certainly has been a good few weeks to be invested in the metal. Gold has now gone higher than $470 an ounce, up from about $430 at the start of the year. It has left the low of $255 it reached in 2001 way behind. You have to go back to 1987, when the price hovered near $500, to find gold at these prices. In real terms, you'd have to go back to 1980, when it was at $800.
There is plenty of evidence that hedge funds, everybody's favorite whipping boy, have been piling into the commodity. According to U.S. Commodity Futures Trading Commission figures, hedge funds and other large speculators increased their net-long position in New York gold futures in the week ended Sept. 27.
Shares in London-based Anglo American have risen to 16 pounds from 12 pounds at the start of the year. Johannesburg-based Harmony Gold Mining Co. is up 40 percent in 2005. South Africa's gold- dominated FTSE/JSE Africa All Share Index has surged almost 30 percent.
"Gold can often be an indication that people feel the willingness of politicians to control inflation is gone," said Stephen Lewis, chief economist at Monument Securities Ltd. in London, in a telephone interview.
Gold is sometimes seen as the ultimate hedge against inflation. It is the oldest form of money. There is a limited quantity of it in the world. Measured over time, gold has been a solid investment.
THE BULL CASE
With higher oil prices, interest rates in Europe at a six-decade low of 2 percent, and signs of inflation emerging, you have the ingredients of a bull case for gold.
And the traditional inverse relationship between gold prices and the dollar no longer seems to be in place. When the dollar was down, investors would buy gold, and vice-versa. The U.S. currency's 3.9 percent surge against the euro during September did little to curb the gold rally.
Yet the bull case may not be right. According to HSBC, there has been no link between gold prices and inflation for the past 25 years. The correlation between the two isn't discernable, it said in a report last month.
And there isn't much demand for the metal, particularly since the world's central banks have started unloading their supplies. Total demand last year was less than in 2000 and 2001, according to HSBC.
AVERSION TO VOLATILITY
Indeed, there may already be some signs that the latest rally is peaking. "Grass-roots consumers are renowned for their aversion to price volatility, especially in the gold market, and a gain of 10 percent in a month is precisely the kind of volatility that will deter buyers for a period of time," the London-based consulting firm GFMS said in a report this month.
It found little evidence of sustained buying from nations such as India or China, where gold has always been a popular investment. GFMS forecasts an average price of $439 for 2005.
Gold's lateness in joining the asset-price bubble is a good indication of how far gold has fallen in the esteem of investors. Equities, bonds, real estate, oil, commodities, art, and just about every other asset has shot up in the last five years. Until recently, not gold.
Interest rates in the major economies, with the possible exception of the U.K., are going up. There will be less easy money around. Growth is about to slow, reducing the prices of all commodities, including gold.
The gold rally is likely to be the last for commodities for quite a while. If it goes to $500 an ounce, anyone buying will be in for a rude shock.
SPECULATION VERSUS INVESTMENT
By Fred E. Foldvary
What is the difference between investing in the stock market and speculating in it?
Does speculation help or hurt the economy? <
Is land speculation different from other speculating?
> Financially, speculation means the ownership of an asset with the intent to profit from expected changes in supply or demand. For example, a speculator buys a share of stock not to benefit from the dividends or the earnings of a company, but because he expects the demand for the stock to rise, lifting its price. Similarly, one speculates in a commodity such as silver because one expects demand to shift, or one might sell short wheat (selling to buy back later) if one thinks the supply will increase more than others expect. Speculators in currencies expect changes in foreign exchange prices due to shifts in supply and demand.
Economically, an investment is either an increase in human capital (useful training and education) or an increase in the stock of capital goods. When one buys shares of stock in a company, that itself is not an economic investment, but a change in who owns the investment in the company and its capital goods and human capital. One invests in a company to obtain a share of its profits.
Speculators don't care about dividends or present-day company earnings. They may think a company will grow, and others will notice this, increasing the demand. Or they may sell short if they think the demand for the shares will fall. They may think that preferences will shift, or some other change will occur. They speculate about future possibilities in an uncertain world.
Speculators in commodities and stocks are helpful because they thicken the markets. A market is thick when there are many buyers and sellers, so one can always buy or sell an asset. Speculators might also stabilize a market by buying more when it looks like there will a reduction in supply, and then selling when the supply actually is reduced, helping to ease the lack. But speculators can also be destabilizing if they add to demand and raise the price too high.
When currency speculators buy and sell large quantities and destabilize the currencies, this is because the currencies were already distorted. The speculators exploit the situation, but they do not cause it. Sound currencies valued at market do not suffer from speculative fever.
Land speculation has different effects from speculation in stocks or commodities. That's because land is local, land is fixed in supply, and land rent gets puffed up by government spending. The fixed supply implies that greater demand just raises the price, unlike commodities that can be produced or imported. Currencies, shares of stock, and commodities have global markets, but land has local markets, so a high local price cannot be arbitraged: one cannot move low-price land into high-priced areas. Finally, unlike commodities, government public works increase the rent, so speculators may actively influence government to provide works landowners don't pay for.
Land speculation hurts wages by taking up land locally, pushing labor to less productive areas. By holding land waiting for the price to rise, speculators decrease the local productivity. The wage level is determined at the least productive land in use, as all the additional product of the better lands goes to rent. The main reason why this market-hurting speculation takes place is because the landowners get territorial benefits without having to pay for them.
There is only one way to eliminate market-hampering land speculation: remove the unearned gains. If the current and future ground rents are used for community revenue, whatever speculation is left will be beneficial. Owners will not be free-riding on the public works and the growth of population or commerce. Wages will rise as land becomes used more efficiently. The margin of production rises as production moves to the more productive areas formerly held for speculative gains.
Land speculation helps cause depressions by making land so expensive it chokes off investment. Only the public collection of land rent stops this. Too many reformers are blaming speculation in currencies for troubles, rather than looking at the land beneath their feet. It takes some sophistication to recognize the vital role played by land. Or else one needs to have the primal wisdom of indigenous folk.
Unfortunately, most people are in between, having evolved to commercial culture and lost the ancient land wisdom, but without the economic knowledge needed to wisely govern the mass societies we have created. Modern man needs to get better grounded.