Gold as an each-way bet is fantasy

April 20, 2011

By Ian Campbell
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

LONDON — Worried about the euro zone? Buy gold. Worried about the U.S. 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 U.S. 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 U.S. 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 percent.

The reality is that the Fed won’t want to monetise the U.S. 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 U.S. 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.

Comments

aw come on. i have a thing with at least 13 ounces of gold in it, and it can’t be eaten. and i can’t eat a bullion bar either. can you? give me a break. who’s going to give you FOOD or WATER or MEDICINE in exchange for a gold bar? it’s always about the speculative bucks. plain and simple. it’s not about anything else

Posted by BillSprague | Report as abusive
 

The whole world knows that gold is currency. The dollar is tanking, if the US raises its debt ceiling, that is justifiably default. China is getting everybody to accept the yuan instead of the dollar. The Fed is selling put options on treasuries. The US is cooked. Paper bugs will be crying in the street. The whole world knows to go for the gold.

Posted by PalomaBlanca | Report as abusive
 

“The author is a Reuters Breakingviews columnist. The opinions expressed are his own.” That is about as literal as it can get. Mr. Campbell, it is not 2001 anymore.

Perhaps you might want to look at the U.S. national debt, the interest it pays on that debt, and its unfunded liabilities. Just that. And then explain how they get out from under it.

“Global recovery is well underway.” Really?? How many clothes are being produced in the U.S.? How many products, in fact, that are not tied directly to global communication? I assume you are buying the USG’s slanted unemployment figures, their skewed and deceptive CPI.

Have you actually parsed China’s public statements? Did you listen to the IMF recently? So if you believe that commodity prices, namely food and fuel, are being buoyed by “growth,” then show me where you’re finding the extra demand that is resulting in restricted supply. And you conveniently avoid any discussion of oil. Nice.

I could go on and on. You are deluded.

Posted by BowMtnSpirit | Report as abusive
 

The same arguments that have be stated repeatedly over the past decade. We’ll see if the great moderation resumes next year or the year after. Most of us in the trenches doubt it; a government and economy predicated on debt is a one way ticket down.

Posted by upstater | Report as abusive
 

Not that I’m superstitious, but pulling an old Bible off the shelf and shaking off the dust, I open it randomly to find a rather prescient ancient quotation in Ezekiel 7:19 which reads,

“‘They will throw their silver into the streets, and their gold will be treated as a thing unclean. Their silver and gold will not be able to deliver them in the day of the LORD’s wrath. It will not satisfy their hunger or fill their stomachs, for it has caused them to stumble into sin.’”

That last sentence of the quote speaks volumes as to the achilles heel of precious metals.

Posted by DisgustedReader | Report as abusive
 

I think that no matter what, buying gold is the solution. Though I agree, cold cannot be eaten and isn’t going to give you food, water nor medicine but it is always good have. It seems like this topic never gets old. I guess that we will just have to wait and see what’ll happen in the nearest future.

Barbara
http://www.mykonospa.com/

Posted by BarbaraRobbins | Report as abusive
 

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