Last Friday, gold surged to a new record of $923.73 an ounce (then $944 on Tuesday). The rise was put down to production problems in the world’s second-largest producer, South Africa, which closed down precious metals mines following the government’s announcement of a “national electricity emergency”.
But gold’s rise is down to much more than temporary power cuts in South Africa. Both institutional and private investors around the world have been seeking exposure to the metal, seeing gold as a safe haven as trouble piles up for the ailing US economy. And the Federal Reserve’s latest panicky attempts to boost the stock market have sent demand even higher. The Fed’s willingness to cut interest rates at the first signs of market panic, says one thing loud and clear – it doesn’t care about inflation.
This is dangerous – last week Mervyn King pointedly observed that slashing rates won’t cure the lack of confidence in credit markets, but like everyone else, he knows that it is very likely to hammer the US dollar. This means more imported inflation for the US at a time when consumer prices are already rising at a 17-year high of 4.1%, supported by an oil price hovering around $90 a barrel.
With people losing faith in the integrity of the dollar, the world’s reserve currency, and other currencies such as the euro and sterling looking equally unstable, increasingly many investors see gold as the best way to protect their wealth.
So can gold’s rise continue? Well, consider that if you adjust for inflation, gold would still need to hit $1,465 an ounce to beat its 1980 high. Suddenly JP Morgan’s 2008 target of $950 to $975 an ounce starts to look rather conservative.
First published the The Evening Standard 1/2/08