Where’s the silver lining?
“Gold is a hedge against inflation.”
That’s such a long-accepted trope you probably don’t remember where you first heard it. Historically, it’s usually been true. The price of gold rises and falls like anything else, but it normally stays fairly closely pegged to the inflation rate. One way to think of it is this: an ounce of gold has always been enough to buy a decent suit of clothes, whether in 1849 when gold was going for $20, or in 2000 when it was up to $300.
But a not-so-funny thing has happened since the 2007 financial crisis — the price of gold itself has become inflated, maybe even hyper-inflated, shooting up to an all-time high last year of nearly $2,000 an ounce.
That’s a pretty nice suit.
So, what was going on there? Was it a bubble fueled by panicky investors here in the U.S.? Talk radio and investing forums were thick with gold hype during the worst of those years. Gold brokers were springing up everywhere, selling dubious gold certificates and engaging in the even more dubious practice of buying gold by mail. This all doubtlessly played a part.
But what played an even bigger role was the chugging engines of Asian economies. China and India, especially, weathered well that financial storm. They had fresh dollars to invest, but Western markets weren’t exactly attractive opportunities. So they invested in what conventional wisdom said was a dependable hedge against inflation. For almost five years Chinese and Indian purchases accounted for more than half the gold consumption in the world.
In the last 12 months things have begun to change. The Chinese and Indian economies have slowed, and with them their purchases of gold. Since September 2011, the price of gold has fallen more than 17% to a still-inflated but somewhat more sane $1,600 per ounce.
Will the slide continue? Or is this an example of a market correcting itself? Time will tell. If anything it’s an abject lesson — perhaps a painful one — for investors. Beware bubbles. Beware hype. And if you’re hedging against inflation, don’t buy in at inflated prices.
The C4:
But a not-so-funny thing has happened since the 2007 financial crisis — the price of gold itself has become inflated, maybe even hyper-inflated, shooting up to an all-time high last year of nearly $2,000 an ounce.
That’s a pretty nice suit.
So, what was going on there? Was it a bubble fueled by panicky investors here in the U.S.? Talk radio and investing forums were thick with gold hype during the worst of those years. Gold brokers were springing up everywhere, selling dubious gold certificates and engaging in the even more dubious practice of buying gold by mail. This all doubtlessly played a part.
But what played an even bigger role was the chugging engines of Asian economies. China and India, especially, weathered well that financial storm. They had fresh dollars to invest, but Western markets weren’t exactly attractive opportunities. So they invested in what conventional wisdom said was a dependable hedge against inflation. For almost five years Chinese and Indian purchases accounted for more than half the gold consumption in the world.
In the last 12 months things have begun to change. The Chinese and Indian economies have slowed, and with them their purchases of gold. Since September 2011, the price of gold has fallen more than 17% to a still-inflated but somewhat more sane $1,600 per ounce.
Will the slide continue? Or is this an example of a market correcting itself? Time will tell. If anything it’s an abject lesson — perhaps a painful one — for investors. Beware bubbles. Beware hype. And if you’re hedging against inflation, don’t buy in at inflated prices.
The C4:
- Since the start of the 2007 financial crisis, we’ve seen some disturbing fluctuations in the price of gold; it shot up to an all-time high last year, reaching about $1,900 per ounce. Now it’s begun one of its steepest ever declines, dropping 17% in 11 months.
- Looking back, there was clearly some gold fever here at home. Conspiracy theorists advocated hoarding while fast talkers were begging us to sell them grandma’s jewelry. That was the start of the bubble.
- Asia is where the bubble blew up. India and China were just as hungry for gold, and they could afford much more. They started buying more than half of all gold on the market…until their economies started to slow. Which brings us to today.
- Is gold still a hedge against inflation? History, as they say, is no guarantee of future performance. The price of gold will probably stabilize and it might even become a decent hedge again. But investors would be wise to remember: gold is a commodity, as susceptible as any to inflation and deflation. Markets have behaved irrationally when it comes to gold, and there’s no reason that won’t happen again.
