Ah, Gold!

The Wonder Metal

Any wonder if gold is said to be the greatest weakness of mankind in general and Indians in particular? Since time immemorial, gold has held a queer fascination for everyone. In its glittering past, many have glorified the yellow metal as the best fit to play the monetary role. But Keynes and William Jennings had castigated it, dubbing it as a “barbaric relic of the past”. Despite what people say about it, gold continues to lure mankind for reasons inexplicable. Or, perhaps it is merely due to what Hartley Withers said long ago: “a survival of primitive barbarism, and dates from a time when the appeal of this nice bright metal to human vanity made it in universal demand for the adornment of the chief … his wife, the temples of the gods and so on.” 

The “human stupidity”—which Hartley thinks as the one that defines gold’s value—is still intact. For, even today gold is believed to be a ‘store of value’. Investors consider it as immune to inflation —to the vagaries of Central Banks’ monetary policies and their printing of currency notes. So, they rush to invest in gold whenever they find the stock markets rocking.

But the fall in gold prices, though started gently three weeks back, after peaking to a high of $1920, happened suddenly. On Monday, with the investors, particularly the Chinese speculators, rushing en masse to sell off gold, the metal plunged. It reached a low of $1534 an ounce—the biggest four-day drop since 1983. Obviously, it was a shock to the global investors, for they all thought of investing in gold as a protection against all the evils that are haunting the Eurozone today and the impact of quantitative easing of the Fed on dollar.

Now the question is: Can gold that has fallen by 15% in three days be considered a ‘store of value’? Or, is it no longer an insurance against a storm? It is not that this has happened for the first time. Even in 2008, immediately following the fall of Lehman Brothers, gold prices jumped, but with the collapse of the stock market, gold too lost its sheen—all within two weeks.

Does it mean that gold too, like any other asset, moves in tandem with the falling prices of other risky assets? Perhaps, yes, in a globalised economy. One reason could be: in a falling market, perhaps gold alone might enable an investor not only to sell it to generate quick liquidity but also to book profit. So, it is the sudden rush of investors for cash in a falling market that perhaps led to the steep fall in gold’s price. 

Now the question is: Has gold, which is usually considered a haven during periods of turmoil, lost its bull run? It is difficult to answer that question, particularly, looking at the low inflation in the US and a stronger dollar that is likely to happen owing to the ‘Operation Twist’ recently launched by the Fed, which, unlike the quantitative easing, will not expand its balance sheet. 

That said, we cannot, at the same time, ignore the impact of the ongoing sovereign debt crisis in the Eurozone on the global economic growth. This is sure to act as a dampener on demand across the countries. If this turns out to be true, gold investors can still find a little comfort in their investments in gold. Which is why it is difficult to say which way gold prices will move.

In any case, what the global economy needs is—be it the prices of commodities of industrial use such as copper, aluminum, iron, and zinc, or crazy metals like gold—stable, not low, commodity prices, for that alone ensures the smooth flow of investments across the nations. This, in turn, creates a stable demand, the grease that smoothes the gears. As against this need, what is happening today—the volatile price movement—is more out of currency gyrations and geopolitical instabilities rather than any fundamental factors of demand and supply in the system.

But then, has ‘stupidity’ any rationale?