Is it time to buy gold?

Gold tends to soar when the markets are in turmoil, when investors fear the worst, and the beast called inflation starts to roar. Is now a good time to buy gold?

Article updated: 30 January 2019 10:00am Author: Michael Baxter

The time to have bought gold was during the late 1990s or in the year 2000. During this period the price fluctuated around $260 a troy ounce.

By 2007, the price was up to around $800. By January 2012, it was at $1,700.

The time to have not sold gold was between 1999 and 2002, which is precisely what the UK Treasury did under the stewardship of Gordon Brown. Thanks Gordon, that cost the tax payer a hefty sum.

Then again, gold can make fools of the best of us. Consider the chancellor who made the disastrous decision to put Britain back onto the gold standard in 1925, against the advice of the man who probably had a greater understanding of the economy than anyone in history; a certain John Maynard Keynes. Britain’s time back on the gold standard was a disaster, the economy was sent spiralling into chaos, and indeed depression, until eventually Britain finally exited the system in 1931. So, who was this appallingly bad chancellor, did his political career plummet afterwards? Well for a time it did, until he eventually made it all the way to Prime Minister. Oh silly me, forget to tell you his name; it was Winston Churchill. A great war time leader and orator was our Winny, but he was a rubbish chancellor.

Safe refuge

There was more than one reason for the rise of the gold price in the early years of this century; one factor was practical; the peculiar properties of gold, such as how it is a superb conductor of electricity, led to rising demand in certain applications such as in computers.

But of course, towards the end of the last decade it soared in price again.

It soared in part because of fear — the banking crisis provided a pretty good motive to buy gold.

But there was another motivation, and this motivation was based on a myth.

During the 2008 to 2011 period, there was a common view that quantitative easing would lead to runaway inflation. Furthermore, it was felt that government borrowing had reached unsustainable levels and that governments around the world would inflate their way out of debt.

During this period, barely a day went by without some media headline proclaiming the case for gold.

The myth

But deep forces were at play, meaning that the underlying drivers of inflation were virtually non-existent. These forces included demographic pressures leading to rising savings worldwide, the rise of China with its unusually high savings rate, growing inequality leading to surging savings worldwide, technology boosting profits at the expense of wages and the internet boosting price competition.

Instead of QE leading to hyperinflation we get low demand across the world, deflation rather than inflation became the big fear, and interest rates persisted at near zero per cent.

The gold bugs were wrong. In 2012, the gold price collapsed, falling by around a third.

Over the last three or four years the gold price has yo-yoed. It rose strongly in 2015, fell sharply in 2016, and did quite well last year.

But frankly, when you consider what a bad year last year was for the markets, I find it surprising gold didn’t perform better.

Winds

There are reasons for investor disquiet. The main ones being the excessive levels of corporate debt, problems in China and a potential banking crisis focused on Italy. Then there is the Brexit and Trump effect — who knows how those two self-inflicted wounds will turn out.

On top of that, the global economy is slowing.

Inflation: a damp squib

But inflation remains as frightening as an unusually cuddly guinea pig. Bank balance sheets are in much stronger shape than in the build-up to 2008.

The day that global forces that have created record low interest rates go into reverse, and rising interest rates make all that borrowing of the last ten years or so unsustainable, is the day I will hit the panic button, and gold may look enticing.

But that day is not now.


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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