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| Gold stars |
| Richard Beales / Oct 08, 2009, 00:47 IST |
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Record gold price: The new record gold price above $1,040 an ounce, set on Tuesday, reflects a multitude of factors: loose money, inflation fears, dollar weakness and conspiracy theories, to name a few. The gold bugs have been right so far, but there is still paranoia built into their case.
One new rumour was that Saudi Arabia and others might be planning to stop pricing oil in dollars, instead using a basket of currencies. That would undermine the power of the dollar. Even though that kind of talk seems premature, it had some effect on Tuesday, helping to push up the price of gold and other commodities priced in greenbacks. Meanwhile loose monetary policies in the US and most of the rest of the world have stoked inflation fears, boosting demand for hedges like gold while also making it easy for investors to fund purchases of all kinds of commodities.
On an inflation-adjusted basis, gold would have to more than double again in price to reach the peaks seen at the start of the 1980s. That gives some headroom for persistent gold bugs. But their case still requires quite a bit to go awry.
For instance, if more countries follow Australia’s move on Tuesday and start raising interest rates, that would help deflate the bull case. Meanwhile there is still time to nip inflation in the bud: with most economies still under the weather, rampant price rises remain a fear rather than a reality for now.
All that said, fears of general dollar weakness are hardly surprising given the US’s sorry economic state and massive borrowing requirements. That provides at the least a persuasive case for currency diversification. If gold proves to be everyone’s alternative of choice, its boosters probably won’t lose their shirts.
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