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Gold hits the heights

The price of gold on the world commodities market is at the highest level since December 1987 (god that seems a long time ago). A number of reasons are given for why it is so strong, such as being a default resting place for investors who are shy of holding stocks, bonds or cash. Gold is also strong because commodity prices in general, such as nickel, zinc, iron ore and bauxite are being driven higher by the voracious appetite for metals and other goods by China.

There may be another factor, though, which ought to set off a few red lights in the central banks. Gold is often a hedge for people against inflation. It seems a long time ago when Britain endured double-digit inflation, but inflation is creeping higher, although that may be simply due to the temporary effects of higher oil prices. Anyway, the gold stuff may be issuing a gentle warning. Let’s hope the Bank of England takes note of it.

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18 comments to Gold hits the heights

  • GCooper

    I seem to recall a Mr. G. Brown of No. 11, Downing St selling much of the UK’s gold stocks, some while ago.

    And yet still the BBC and other Leftist media outlets try to portray the man as some sort of genius!

  • Richard Easbey

    Where’s Euan to tell us that inflation is really a good thing since it’s yet another gift from our friends in government?

  • GCooper,
    Yes , Brown let it go at a knock down price,he used the money to buy Euros.
    Of course the man cooked the books on inflation by excluding house prices.

  • “Anyway, the gold stuff may be issuing a gentle warning”

    Ah… the value of prices… where would we be without them?

  • Verity

    Brown should be tried as a criminal against the state. What an incredibly irresponsible, stupid, ego-driven little Scots-chip-on-the-shoulder 10th rater. (Hey! Remember that drab wedding? Where he didn’t want to kiss the bride? Anyone ever figure out what that was all about?)

    Selling gold. Selling gold.

    And wasn’t it commie Harold Wilson’s government who sold off our portfolio of stocks in the United States, the world’s richest economy?

    And weren’t we, at that time – before he signalled “Sell!”, the biggest investor in the United States?

    And still the commies haven’t managed to destroy Britain. Not even with Tony Blair talking down Britain and biggin’ up Islamic terrorists and warning the British not to be guilty of “racism”.

    But it’s got to stop. And it won’t stop with the oily David Cameron. If he gets in, then the Tories are stone cold dead in the water. Cameron is another very, very bad spirit – not as focussed as Tony Blair – but bad enough to kill the Conservatives off and collude in the establishment of a one-party “concensus” state in Britain.

    In which case, tarrah, then.

  • permanent expat

    Unless I am much mistaken, Verity, Harold Wilson had nothing much to sell to the Americans. They already had it all. As I remember, every plane, ship, tank & bullet the Americans sent us before they came to our rescue in WWII had to be paid for……and was. Roosevelt was determined to destroy the British Empire which he hated; almost every holding we had in the Americas was liquidated to meet our debts incurred by “standing alone”. I am still astonished at how many people still believe that it was American generosity that helped us stay on the winning side. I am certainly not anti-American; I admire them greatly & they are excellent businessmen. They successfully removed us from the post-war picture……and are still “friends”. Well done I say.

  • Julian Taylor

    It’s funny you mention the rising investment into gold Jonathan. I received a letter from my brokers a few days ago, suggesting a transfer of a number of reliable UK stocks either into bonds or into certain gold-backed securities. Coupled with the story regarding Barclay’s anxiety over rising card debt I wonder if maybe marks a few specks of dirt in the G.Brown esq. “always a boom, never a bust” economic gravytrain.

  • Since the dollar has been strengthening, the UK sterling effect must be even more pronounced than the dollar price rise and Jonathan is right to say the Bank of England should take note.
    If there is resurgent inflation, however, I believe it is little to do with the oil price, as I have argued here(Link), and more to do with too much money chasing too few services and (less importantly) goods. Interest rates may be higher in the UK than many other countries but so is the burden of regulation and tax on business.

    This is especially the case in service industries which are labour intensive because so much of the extra burden is related to employment. Manufactured goods can easily be imported from China but stick a bunch of eager chinese workers in the back of a lorry and bring them over here to work in service industries and the authorities get very upset.

    If there is resurgent inflation then maybe it is better to invest in resources companies ie. mining stocks, oil companies and alternative energy rather than in commodities since they also produce income. Just a thought.

  • John East

    Gold, the glorious relic.

    I started investing in gold at the peak of the dot-com boom having stupidly followed the herd into tech stocks and losing half of my stake in the process. Moving into gold was the obvious investment choice once I’d come to realise that when everybody is piling into one investment it’s a guarantee that their money is going to be taken off them.

    The gold bull should have many years to run, although it will be a rough ride. I expect it to soar past $1000/oz, but however far it rises, as soon as we see constant coverage in the media, and your taxi driver starts bragging about his gold investment, that will be the time to sell.

    The only hotter commodity at the moment is uranium. (No pun intended).

  • GCooper

    John East writes:

    “… when everybody is piling into one investment it’s a guarantee that their money is going to be taken off them.”

    Indeed. And it was already an established principle when Nubar Gulbenkian enshrined it as an axiom.

    The problem, as with many things in life, is timing.

  • Phil

    …Gold hit a price not seen since 1987…
    if you put $500 in to a 5% note in 1987, you’d have $1200 today. If you put $500 into gold in 1987 you’d have $500 today.

    And my dad has some $750 per ounce Krugerands, from 1980, too.

  • John East

    Phil,
    As GCooper said, timing is everything.

    Your dad has at least demonstrated far more sense than our idiotic chancellor, Gordon Brown, who sold off around $500 billion of our gold at the market bottom of $250/oz. What’s even worse is that the idiot learned nothing from this. Last year he was urging the IMF or World Bank (I forget which) to sell off their gold when it was around $390/oz to solve world poverty, i.e. to stuff the Swiss bank accounts of third world dictators.

    Your dad, or his heirs, will get their krugerand investment back eventually with interest because gold has been the only store of value for millennia and is likely to remain so long after we have forgotten the US$ and the Euro.

  • Veterano Osborne

    Ah, gold. I made my grubstake from four 1oz Krugerrands, but that was in the mid-70s when inflation in the UK was heading towards the 26% top of August 1975, IIRC.

    Inflation’s stuck like glue at 2-3% now and I can’t see it taking off in the near future unless there’s another resource-war like 1973-74.

    The votaries of the ‘barbarous relic’ have been trying to talk it back up for decades, but in real terms its value rests far below 1987, when it spiked temporarily on fears of a stockmarket collapse after the October seizure which never materialised. Indian jewellery requirements during their economic boom were meant to haul the bullion price up, but only up to a point, Lord Copper. Likewise the Iraq War. They used to say ‘when guns go off, gold goes up’ but again, only in a limited way this time.

    Gold pays no income and incurs storage and insurance costs. Not attractive for the small man unless he expects an almighty crash in equities, and shares don’t look all that expensive at present on an EBITDA measure. Their real yield outlook is quite good too: way different from 1987.

    As for inflation, the much maligned Mr Brown has just becme the first Chancellor in modern times to get a 50-year gilt away on a tiny real interest rate.

    The omens are more for deflation than rip-roaring consumer prices. There is no serious short-term shortage of any major fuel or commodity: the impact of Chinese and Indian demand push has been less than their published GDP growth would lead one to expect. Currencies have become rather stable lately, too. I suspect the dollar crunch is a mid-term worry, not an imminent danger, now that Bush is winding the daft war down. The departure of Greenspan was well handled.

    I’d stick to a portfolio basically composed of sound yielders, AA+ corporate bonds and a dash of cash, with only 0-5% gold-related investments if you want a punt. As for mines, I prefer UK Coal!

  • John East

    Veterano,
    Thanks for presenting the mainstream assessment on gold. I feel more relaxed about the future of the gold bull when I see such sentiments.

  • I’d stick to a portfolio basically composed of sound yielders, AA+ corporate bonds and a dash of cash, with only 0-5% gold-related investments if you want a punt.

    One good argument I’ve read is that a portfolio regularly rebalanced to contain 2% gold is ideal. 2% is small enough that you’ll scarcely notice the general tendency for its price to fall, but large enough that in those very rare cases where its price rockets, you really will benefit.

  • John East

    Peter,
    Reality check time.
    You wrote, referring to how much gold one should hold in ones portfolio, “2% is small enough that you’ll scarcely notice the general tendency for its price to fall”
    General tendency for its price to fall? Gold has been rising dramatically and consistently for the last 5 years.

    With any investment there is no such thing as a general tendency. If there was we would all be millionaires. All investments rise and fall. Period.

  • Luniversal

    “Gold has been rising dramatically and consistently for the last 5 years.”

    So, gold’s nearing the top of its bull run, eh?

    I’d keep 5% in the relic as insurance against cataclysms which, as V. Osborne says, aren’t obvious at present.

  • John East

    Luniversal,
    Is that right, all bull runs last for 5 years?