INVESTORS REGARD gold as a safe-haven asset in uncertain financial times. They hope the precious metal can hold its value when most other financial assets - shares, currencies and property - may not. Earlier this month, gold breached the $1,000 per ounce price level – a key psychological threshold - and last week it set a record high against the dollar. The soaring gold price has mirrored the recent decline in the dollar as international concerns grow about the health of the US economy and questions are raised about the dollar’s future as the world’s major reserve currency.
In the US, a combination of near zero interest rates, expanding deficits and a rising national debt has lowered international confidence in the American economy. Fears that rising future inflation will erode the dollar’s value have increased investor concerns about the currency among some of the very large holders of dollar assets, including China. Its foreign reserves are mainly invested in US treasury bonds and amount to $800 billion. In any rapid decline of the dollar, China would be the biggest loser.
For worried investors who want to hedge their risk, whether against inflation or market uncertainty, gold offers one form of diversification. But because the metal is a non-interest bearing asset, gold provides no income stream. Investors must rely on capital appreciation to secure a return. Since the start of the financial crisis in August 2007, gold has outperformed most other asset classes. The metal serves both as a commodity and a monetary asset; its market price is determined by jewellery demand, where gold is a staple, and by investment demand, which is greatest at times of financial uncertainty.
A major turning point in the fortunes of gold occurred in 1971 when President Nixon allowed the gold price to float from the $35 an ounce set by President Roosevelt in 1934. In the late 1970s, with inflation in the US at its highest in the country’s history, investors lost confidence in paper money and the dollar, and the gold price peaked in 1980 at $850. The gold bubble quickly burst as inflation was brought back under control, the dollar recovered and as mining companies produced more gold, the price fell.
The short history of gold shows a rising price over recent decades. A longer history shows that gold has disappointed as an investment asset. Nevertheless, gold has its own mystique and the appeal of the precious metal remains undiminished for many.