GOLD / THE FINANCIAL TIMES LEX

Gold

Published: September 9 2009 09:25

Like a cure-all tonic prescribed by a travelling rural huckster, gold somehow seems to be good for nearly everything that ails us. Just consider the diverse economic backdrops that have caused its price to spike over the years. Back in January 1980, when the yellow metal hit $850 an ounce – still the record in real terms – western economies were being squeezed by the second oil crisis and record postwar inflation. Fast-forward to March 2008 when it broke through $1,000 for the first time on haven buying as Bear Stearns teetered. It approached the same level a few months later when bank worries had temporarily eased but commodity fever was peaking, and again in mid-September when Lehman’s collapse created so much physical demand that smelters were working overtime.

The common thread in these episodes was fear and, for those who bought near the top, peace of mind was costly. It would be tempting to dismiss the latest surge above $1,000 an ounce as more of the same were it not for legitimate concerns about the currency in which its price is denominated. The dollar index, a trade-weighted average of the dollar against six major world currencies, neared a multi-year low around 77, down from 121 eight years ago, as foreign creditors fear an endless stream of red ink from Washington.

Gold: Unstable metal

Interactive timeline charts economic and political events that have driven the gold price from 1900 ( http://www.ft.com/cms/s/0/046b52f6-3a41-11de-8a2d-00144feabdc0.html)

Stories of those who preserved their wealth or escaped hunger in decades past by hoarding gold when their governments set the printing-presses loose provide gold bulls with a compelling historical narrative. But the US is not Weimar Germany and, in spite of interest rates that make the cost of holding gold low, there are smarter ways to anticipate inflation. Bricks and mortar, mineral rights or even equities do the trick with superior historical returns. Financial panaceas, like medical ones, should come with a health warning.