The gold bug variations
Despite its romantic allure, gold has historically been a pretty lousy investment. Since the invention of interest-bearing assets portfolio diversification, there is very little financial incentive to hold large amounts of gold. The one exception to this rule, however, is when it seems like high inflation is imminent at the same time that everything else ...
Despite its romantic allure, gold has historically been a pretty lousy investment. Since the invention of interest-bearing assets portfolio diversification, there is very little financial incentive to hold large amounts of gold. The one exception to this rule, however, is when it seems like high inflation is imminent at the same time that everything else in the global political economy going to hell in a handbasket. The last great gold rush -- when it hit $850 in 1980 -- came at a time of double-digit inflation in the U.S., a stagnant global economy, and geopolitical instability. Gold appears to have risen in value in recent months and years -- is this a sign of the current global political economy crashing and burning? The Economist's opinion page says I should relax: Nothing swells the breast so much as the thought that you have been proved right at last. After riding high at the start of the 1980s, gold bugs had a miserable couple of decades. The price declined relentlessly, mocking their credo that the security of the financial system ultimately depends upon the yellow metal. Lately, though, the faithful have enjoyed their reward. In the past five years the price of gold has doubled. This week in Asian trading it briefly surpassed $500 a troy ounce?a level last breached in 1987. You can almost feel the bugs' excitement as the message sinks in: gold is back. This being gold, the resurgence has brought forth all manner of alarming prophecies. The price is an omen of rampant inflation; bonds are doomed; the dollar is about to fall prey to the United States' reckless deficits; the euro will shortly be revealed as a worthless creation of bureaucrats. The world is an unpredictable place. But, with the possible exception of a fall in the dollar, not much of the above catalogue of doom looks likely; and none of it has much to do with gold's good run. The dull truth is much less bullish for gold. Investors have put money into a wide range of metals, and precious metals' prices, including gold's, have risen with the base. Meanwhile, gold remains fundamentally unattractive. It yields nothing and central banks are sitting on vaultfuls of the stuff that they want eventually to sell. Gold bugs hope that $500 is the threshold at which mainstream investors will start once again to take an interest in the metal. Caveat emptor.So do I feel better? Yes and no. While the Economist is correct about gold in particular, I'm more concerned about the fact that "investors have put money into a wide range of metals." This could be because China's growing demand for raw materials has driven up the price of all commodities. But it could also be because risk-averse investors have figured out that they can buy something besides gold as a hedge against high inflation and political instability. I strongly suspect that Chinese economic growth is the primary driver, because U.S. inflation right now is much lower than it was in 1980. On the other hand, a lot more foreigners hold dollars than they did in 1980, and the difficulty of predicting when the dollar will start to fall has me wondering if something else is going on. Developing....
Despite its romantic allure, gold has historically been a pretty lousy investment. Since the invention of interest-bearing assets portfolio diversification, there is very little financial incentive to hold large amounts of gold. The one exception to this rule, however, is when it seems like high inflation is imminent at the same time that everything else in the global political economy going to hell in a handbasket. The last great gold rush — when it hit $850 in 1980 — came at a time of double-digit inflation in the U.S., a stagnant global economy, and geopolitical instability. Gold appears to have risen in value in recent months and years — is this a sign of the current global political economy crashing and burning? The Economist‘s opinion page says I should relax:
Nothing swells the breast so much as the thought that you have been proved right at last. After riding high at the start of the 1980s, gold bugs had a miserable couple of decades. The price declined relentlessly, mocking their credo that the security of the financial system ultimately depends upon the yellow metal. Lately, though, the faithful have enjoyed their reward. In the past five years the price of gold has doubled. This week in Asian trading it briefly surpassed $500 a troy ounce?a level last breached in 1987. You can almost feel the bugs’ excitement as the message sinks in: gold is back. This being gold, the resurgence has brought forth all manner of alarming prophecies. The price is an omen of rampant inflation; bonds are doomed; the dollar is about to fall prey to the United States’ reckless deficits; the euro will shortly be revealed as a worthless creation of bureaucrats. The world is an unpredictable place. But, with the possible exception of a fall in the dollar, not much of the above catalogue of doom looks likely; and none of it has much to do with gold’s good run. The dull truth is much less bullish for gold. Investors have put money into a wide range of metals, and precious metals’ prices, including gold’s, have risen with the base. Meanwhile, gold remains fundamentally unattractive. It yields nothing and central banks are sitting on vaultfuls of the stuff that they want eventually to sell. Gold bugs hope that $500 is the threshold at which mainstream investors will start once again to take an interest in the metal. Caveat emptor.
So do I feel better? Yes and no. While the Economist is correct about gold in particular, I’m more concerned about the fact that “investors have put money into a wide range of metals.” This could be because China’s growing demand for raw materials has driven up the price of all commodities. But it could also be because risk-averse investors have figured out that they can buy something besides gold as a hedge against high inflation and political instability. I strongly suspect that Chinese economic growth is the primary driver, because U.S. inflation right now is much lower than it was in 1980. On the other hand, a lot more foreigners hold dollars than they did in 1980, and the difficulty of predicting when the dollar will start to fall has me wondering if something else is going on. Developing….
Daniel W. Drezner is a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and co-host of the Space the Nation podcast. Twitter: @dandrezner
More from Foreign Policy
Saudi-Iranian Détente Is a Wake-Up Call for America
The peace plan is a big deal—and it’s no accident that China brokered it.
The U.S.-Israel Relationship No Longer Makes Sense
If Israel and its supporters want the country to continue receiving U.S. largesse, they will need to come up with a new narrative.
Putin Is Trapped in the Sunk-Cost Fallacy of War
Moscow is grasping for meaning in a meaningless invasion.
How China’s Saudi-Iran Deal Can Serve U.S. Interests
And why there’s less to Beijing’s diplomatic breakthrough than meets the eye.
Sign up for Morning Brief
Foreign Policy’s flagship daily newsletter with what’s coming up around the world today. Delivered weekdays.
By submitting your email, you agree to the Privacy Policy and Terms of Use and to receive email correspondence from us. You may opt out at any time.
