Thursday, April 28, 2011

The Economist Weighs In On Gold

So, who's not interested in gold and silver these days?  No-one, you say.  That's a bad sign, as the Economist points out.   But, would you feel any more secure if you were the only one you know who was buying the yellow metal?

There are a lot of reasons to like precious metals: inflation, debased currencies, American decline, wrongheaded government in a time of crisis, and financial uncertainty, for instance.  There are a lot of reasons to not like it as well: no yield, little intrinsic value, too high of a run for too long, too popular, etc.

The Economist concludes with the following observation:

Then there is the issue of higher commodity prices. Jeremy Grantham of GMO, a fund-management group, has compiled an equally weighted index of 33 commodities. This fell by 70% between 1902 and 2002 in real terms. It has regained all that ground in the past nine years. The rise of developing nations is generally deemed to explain this commodities boom. Since raw materials have greater weight in the inflation baskets of such countries, it makes sense for investors in China and India to buy gold as a hedge against this phenomenon.
If it turns out that China (rather than gold) is a bubble and that growth in developing nations disappoints, then you would expect commodity prices to fall sharply and gold to follow suit. But in the absence of such an event, gold’s strength is not entirely irrational. 
Are metals rising--for the past decade, especially since November of '08--because things are so bad here, or because things are so good in emerging countries.  Probably both, in Noman's estimation.  Regardless of your position on the phenomenon we can all agree that it makes for interesting speculation.

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