Gold remains firm as there is increasing nervousness about the global economy and indeed nervousness about the global monetary system and this is leading to continuing strong investment demand. Gold remains at or near record highs in nearly all major currencies ($914.00 £622.11 €713.06) and looks set to regain its nominal record high of $1,030/oz in the coming weeks. UBS joined Goldman Sachs and Merrill Lynch in drastically increasing their gold price forecasts yesterday. UBS has increased its 2009 average gold price forecast to $1,000 an ounce from $700 as investors seek a safe haven from the financial turmoil.
There is a gradual realization that slashing interest rates to zero and close to zero is not the magic wand, quick fix to our global economic ills. Especially as one of the continuing major challenges is the availability of credit and money rather than the price of credit and money.
Banks remain very hesitant to lend and it does not make a huge difference to businesses and employers who need credit whether interest rates are at 0% or at 3%. And now frugal and prudent savers are being punished as they see their savings debased in an unprecedented monetary experiment of massive money printing, quantitative easing and monetization of debt (printing money to buy government bonds).
The Bank of England cut rates to a new record low of 1.5% but experts warned that the cut ‘will not help Britain climb out of recession’ and some saw the cut as “pointless” with the potential to create inflationary problems and even possibly a sterling crisis.
Understandably, gold’s store of value qualities are in demand internationally. Gold’s detractors always point out that it does not offer a yield – they are slower at pointing out that very few paper assets today do.
Gold has been proven to preserve wealth throughout history – in all manner of recessions and depressions including stagflation, virulent inflation, hyperinflation and deflation. While the man in the street and the consensus is concerned about deflation, the real medium to long term threat is inflation and investors should be cognoscente of this real risk.
While investment demand remains very strong there are growing fears about the declining supply of gold – the world’s mine gold supply has been falling in recent years and it fell to 2,385 tonnes last year, down 3.6 per cent from 2007 (despite the rise in prices in recent years).
The first law of economics is the law of supply and demand. There is a finite amount of gold in the world and thus supply is finite. Fiat money creation is anything but finite and never has so much money been created in the history of the world as has been seen in recent months.
Thus, over the medium to long term the value of paper currencies will inevitably fall versus the finite, universal currency that is gold.