Published: November 8 2010 15:11
Last updated: November 8 2010 18:17
Current inflationary fears unquestionably add to gold’s lustre. The metal is hard, while money is getting soft as governments abuse their position as privileged borrowers; the International Monetary Fund reckons that by 2011 the ratio of debt to gross domestic product in advanced economies will have risen by 29 percentage points since the crisis. The US Federal Reserve is willing to dilute the value of dollars by creating 600bn more of them.
But the rising gold price does not support the idea that gold can be a force for global stability, as Robert Zoellick, the president of the World Bank suggested on Monday. He said that “markets are using gold as an alternative monetary asset today”.
Not really. Transactions are not being priced in ounces of gold. And imagine that Mr Zoellick gets what he seems to want: a world unthreatened by monetary excess with gold as one key reference point. The initial ratio of paper and electronic money to gold would not really matter; the point is to keep the ratio steady. If such stability were widely thought likely, gold-buyers who had wanted a hedge against inflation and conflict would become sellers. The price would drop.
Indeed, a key reason investors are buying gold is they think Mr Zoellick and other optimists are whistling in the wind. The speculative desire to get ahead of the deteriorating world – a speculation funded by the easy money which they abhor – has made the price an unrealistic indicator for any future currency accord.
Copyright The Financial Times Limited 2010.
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