Universal hedge

The price of gold isn’t likely to go up much when investors expect good economic growth, sound monetary policy and moderate government deficits. That’s not the case right now. Investors have more money than clear opportunities and much to worry about. Gold could cross the $1000-an-ounce line, and keep on rising.

The recession has reduced demand for the yellow metal for jewellery and industry – down more than 20 per cent in the second quarter from the previous year. But investment demand was up 46 per cent. And that’s during a period that stock markets recovered and the threat of multiple bank failures – a favourite scenario for gold bugs – receded.

A serious increase in investor interest would cause the gold price to soar. The annual supply from the mines is worth only around $100 billion at current prices, small change in a world where the US government deficits is measured in trillions.

Some additional demand could come from China and other high-saving Asian countries. The creation of a new storage facility for physical gold in Hong Kong could help excite more interest.

But anti-depression monetary policies are the biggest source of additional gold-buying power. At the peak of the credit bubble, the excess liquidity went to push up the price of stocks and housing. But stock prices may be held down by the depressing effect of recession on earnings while many countries are wrestling with a huge supply overhang of housing.

The world’s major central bankers have made it clear that their policies will remain stimulative until doubts about growth have dwindled. That commitment leaves some investors worrying about a worse recession, some about government over-borrowing and others about monetary stimulation that leads to inflation. All of these worriers might want to take out a little insurance in the form of gold. Even those don’t worry might want to go along for the ride. And since gold is selling at 60 times the price of silver, far above the long-term average, silver might also be worth considering.