When reading an article today on Bloomberg, entitled “Gold Rallying to $1,500 as Soros’s Bubble Inflates“, I couldn’t help but notice the following quote from Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt:
“Either a swift economic recovery or further dismal economic performance should bring new buyers into the market. A stronger economy would create more jewelry demand. If the economy stays weak or gets worse, then investors will be looking for a safe haven.”
So what Weinberg is saying, essentially, is that he expects investors in gold to profit regardless of the conditions in the rest of the economy. Now clearly this cannot be correct, because if it is, then Weinberg has discovered some sort of Holy Grail of the investment world – ie. an instrument that allows the holders to profit regardless of the nature of economic conditions.
What I believe that Weinberg has omitted from this analysis is that if the economy recovers to a state of positive economic growth and low inflation, then that is likely to be negative for gold prices, as demand for it as either a “store of value against inflation” or as a “safe haven against economic uncertainty” is likely to dimish somewhat, and because gold generates no cash flows for its owners – in this sense it is the ultimate speculative asset – then that decline could be quite substantial.
- Is Gold Really a Commodity? (online.wsj.com)
- Gold is glittering again. But why? (money.cnn.com)
- “Inflation vs Deflation, The Winner is Gold?” and related posts (marketoracle.co.uk)
- Gold and Deflation (wallstreetpit.com)
- Gold rises for 4th straight week (reuters.com)