The Conversation (0)
Gold investment is becoming more accepted as a substitute for currency by industry observers, particularly in light of the context of all four major currencies experiencing structural debasement.
Gold investment is becoming increasingly accepted as a substitute for currency by a variety of industry observers. With the investment thesis that gold should be considered as a currency, Michael Purves, Chief Global Strategist and Head of Derivatives Research, BGC Partners offers some comments on the price of gold, “what is driving the appreciation in gold over the last several years is a need by a wide range of investors for a currency that is hard money, in other words not controlled by central bankers.”
In terms of relative prices, and with the context that, “A currency is defined by how much goods and services it can purchase. In 1979 when gold had completed a nice aggressive rally and finished up at $500 [per troy ounce] if you compare what an ounce of gold bought you in 1979 versus today, gold is still dramatically cheaper today. For example if you look at its relationship to how much of the Dow Jones Industrials it would buy you it is about one sixth today, in other words gold is one sixth as expensive as it was in 1979 at $500 [per troy ounce].”
Earlier this year Brazilian Finance Minister Guido Mantega described the fiat currency issue as a currency war, which has been demonstrated by the devaluation of the Swiss franc and the more recent Currency Exchange Rate Oversight Reform Act, entreating the United States government to penalize China for its role in currency manipulation.
Natalie Dempster, Director of Government Affairs for the World Gold Council offered an interesting commentary regarding gold price relative to currency devaluation, “If we look at the current macroeconomic situation it is very evident just now. What gold doesn’t have is it doesn’t have credit risk. Many reserve managers bought euro bonds in good faith and are now looking at a 50 percent haircut on Greek debt or even a possible outright default. With respect to cash, they have a situation where fiat money is being undermined by the printing presses. While gold doesn’t offer a yield, if you look at yields on cash just now they are strongly negative around the world.”
Trend continuation
The newly appointed president of the European Central Bank, Mario Draghi has surprisingly decided to reduce interest rates by 25 basis points to 1.25 percent with a cautionary explanation that the Eurozone may experience a “mild recession” during the fourth quarter of this year. The policy shift was covered by a news conference where the bank’s direction was explained, “The underlying pace of monetary expansion continues to be moderate. After today’s decision inflation should remain in line with price stability over the policy relevant horizon. Owing to their unfavourable effects on financing conditions and confidence, the ongoing tensions in financial markets are likely to dampen the pace of economic growth in the euro area on the second half of this year and beyond. The economic outlook continues to be subject to particularly high uncertainty and intensified downside risks.”
For gold investors this supports the position of negative yields on cash as inflation in the Eurozone is expected above 2 percent, with current inflation data indicating that the consumer price index climbed to 3 percent in September, increasing beyond its crest for the current year of 2.8 percent.
Spot market gold price movement
Responding positively to the news of the interest rate decision in Europe, the price for gold has appreciated to a value around $1761.80 per troy ounce, for a gain of just over 1.4 percent over the previous trading session.
Securities Disclosure: I, Dave Brown, hold no direct investment interest in any company mentioned in this article.