Driven by fear and frenzy

Markets:  Worried about the euro zone? Buy gold. Worried about the US deficit? Buy gold. Fancy a quick speculative punt? Well, you can’t lose with gold...or silver, which has almost trebled in price in just over six months. But precious metals can’t be both safe havens and speculative plays. And with equity markets rightly signalling global recovery and higher interest rates, these speculative bubbles are set to be pricked before long.

The gold and silver bugs will say global sovereign risks justify their trade. Standard & Poor’s has put the United States on negative watch. Uncle Sam isn’t about to default, but it lacks a plan to put his finances straight. Gold bugs fear the US Federal Reserve will buy more domestic debt, devaluing the dollar and precipitating inflation, making gold — now at over $1,500 a troy ounce — all the more precious.

A weak dollar ought to favour the euro. But that saddles investors with different sovereign risks. The euro zone won’t print its way out of trouble: Germans have seen a great inflation before and don’t fancy a repeat. The European Central Bank is raising rates and looks reluctant to extend emergency liquidity to troubled banks. But the euro zone periphery can’t pay its way, hence fears that Greece must undergo a debt restructuring that would be messy for its banks and risk contagion. Europe does not have a solution to the problem. What to do? Buy gold.

This logic would be compelling if the interest rate outlook was benign and gold didn’t already appear pumped up by speculative buying. The spectre of inflation means rates are already rising outside the United States. Global recovery is well underway. Intel,IBM and Yahoo have reported good earnings.

The latest ISM survey of US manufacturing says the recent trend of “rapid growth” continued in March. Surveys confirm a German manufacturing boom. China’s first quarter GDP growth was 9.7 per cent. The reality is that the Fed won’t want to monetise the US government’s debt. It will join the global trend of rising rates late this year or early next. The opportunity cost of holding precious metals will then rise. The end of free US money threatens buoyant equity and commodity markets too — but they are helped by the fact that the driver of the monetary tightening is growth. If speculative excesses are set to be curbed, nothing looks more vulnerable than the former safe havens of precious metals.