Gold bullion has risen by $105 (11.6%) since its low of July 9, breaching $1,000 a few days ago and now trading at levels last seen at an intraday high of $1,033 in March 2008.
Gold bulls argue that the yellow metal stands to gain from rising inflation expectations as governments engineer the biggest asset price reflation in human history. On the other hand, John Mauldin (Thoughts from the Frontline) is of the opinion the rise in gold does not really tell us anything about the future of inflation. It is his belief that if the Fed were to withdraw from the current economic battle, the forces of deflation would be felt in short order. Mauldin contends the answer to the question “Will we have inflation in our future?” is “You better hope so!” But gold may not be a bad performer in a deflationary environment either as a store of value as the economy sinks into the abyss.
Although the declining dollar has been one of the catalysts for gold’s rise, it is also important to note that gold bull markets are usually characterized by the metal making headway in all currencies. As shown below, this is now happening with bullion rising in terms of most major (and minor) fiat (paper) currencies.
Source: Plexus Asset Management (based on data from I-Net Bridge)
Source: Plexus Asset Management (based on data from I-Net Bridge)
I believe another driver of the rising gold price is China’s loss of confidence in the greenback. The Chinese are more than a little concerned about the large exposure they have to the US dollar (most of their foreign reserve holdings are invested in US government bonds) and have been diversifying into other currencies such as the euro and the yen, as well as gold and other commodities. In fact, it was recently announced that China has doubled its gold reserves to 1,054 tonnes in the last few years, making China the world’s fifth-largest holder of gold, just ahead of Switzerland, and among the six nations plus the International Monetary Fund that have reserves of more than 1,000 metric tons.
According to John Mauldin, the steady rise in gold over the last eight years to the current level has roughly tracked the emergence of China as a superpower in foreign reserve holdings, which now stand at $2 trillion.
In view of all the uncertainty regarding the sustainability of the current improvement in the global economy I am of the opinion that one should have gold in one’s portfolio. The last words go to long-timer Richard Russell (Dow Theory Letters) who summarizes the investment case as follows: “Gold is the standard, it can’t go bankrupt, it will rise in value if the dollar tanks, it will rise in value if inflation takes off, and it will sky-rocket if the US tries to inflate its debts away.”
