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Gold: The Latest Sign of Good News

Gold: The Latest Sign of Good News

By Simon Constable

Businessmen pushing piles of money in wheelbarrows.
SourceGary Waters/Getty


A price fall in investing isn’t always a bad thing.

By Simon Constable

Simonomics: A regular look at the global economy from a former staff columnist at The Wall Street Journal.

Be afraid. Be very afraid. Or maybe not so much now.

When people see headlines about a market crash or some government turmoil, they tend to look for something secure, which in some cases includes stocking up on gold the way you might water bottles in a drought. (Yes, people still stick coins in their mattress and bury bars in their backyard.) And yet, with every reason to be afraid about the future of the so-called global economy staring us in the face, that doesn’t seem to be happening these days.

Indeed, instead of the price of gold rising as it would when demand grows, the precious metal’s value has tumbled to around $1,100 an ounce — a 16 percent drop from last August. Recently, it  sank to a five-year low. Apparently, there’s only one smart conclusion to draw from all this: Despite a rash of geopolitical and inflationary issues, investors just aren’t as scared anymore. Fear seems to be in short supply at the moment.  

Certainly, we’d be justified to be worried. From Ukraine to the Middle East and Africa, there are plenty of geopolitical conflicts to feel anxious about — but none has made investors sufficiently worried to bulk up on bullion. That, according to Jim Steel, chief precious metals analyst at the bank HSBC, means “the wider geopolitical landscape does not appear to be tense enough to drive prices higher.” Likewise, investors who purchased the metal as a long-term hedge against inflation — meaning the declining buying power of paper money — aren’t freaking out either. Turns out, the hyper-inflation that some pros predicted a few years ago failed to materialize, according to a report from the commodities-focused consulting and advisory firm CPM Group. And inflation concerns should diminish even further as the Federal Reserve looks set to raise the cost of borrowing money, a move designed to crimp inflationary pressures.

When the Chinese stock market started to melt down, not only were stocks liquidated, but so was gold.

Jeff Saut, chief investment strategist at financial firm Raymond James

All of which translates to too little fear among investors to justify the economics of gold. And it’s worth remembering that buying a bar of the metal provides you with precisely zero dividends, and owning it actually costs you, regardless of price movements, because of the expense of insuring gold bullion and storing it somewhere safe. 

Another crucial factor is that times are better in the U.S. — by far the biggest economy in the world. It’s returning to steady growth, more factories are cranking out more goods than a few years ago, and first-time claims for unemployment insurance recently dropped to their lowest level since the early 1970s. Meanwhile, in Japan, the world’s third-largest economy, the stock market has rallied substantially as the country looks to bust out of a two-decade-long stagnation.

That only leaves China, where stock market crashes are making headlines, to worry about. It turns out that during its stock market surge, investors were lured away from gold and toward equities. At the same time, Chinese brokerage firms accepted gold as collateral in margin accounts so folks could buy Chinese stocks. “When the Chinese stock market started to melt down,” writes Jeff Saut, chief investment strategist at the financial firm Raymond James, “not only were stocks liquidated, but so was gold.”

Nobody can know, of course, what the future of gold holds, if you happen to still have some bars hidden in your backyard. For its part, CPM Group says there’s been little past correlation between retail demand and the price of the precious metal. Instead, demand for gold among investors — projected at roughly 20 percent of the 4,040 metric tons of gold to be produced this year — is what most closely corresponds to gold’s price fluctuations. Bottom line: Investor sentiment matters, a lot. And for the moment, cautious optimism seems to be ruling the day. 


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