Gold is set to become more popular than the stock market for many investors. The recent stock market rally which began in March 2009 will shortly be seen for what it was – a rally in a bear market. But many are holding back, uncertain if gold really is the answer. After all, it is a commodity, and commodities, including gold, have suffered in the recession more than stocks. So where to invest – gold or the stock market?
It was the failure of the banking sector in the US and Europe that started the recession. The bail-outs by western governments, borrowing astronomical amounts of money from who-knows-where, euphemistically referred to as “the taxpayer”, made matters worse by way of triggering the crash in stock prices.
Gold, on the other hand, relished this situation, and rose to nearly $1,000 an ounce for a while. But then came the rally, which dampened gold down to the $910-$940 range. That’s the thing about gold – it does well when stocks are depressed but less well when stocks are rising.
On the other hand, gold is a commodity like any other commodity, and commodity prices, like most other prices, have tended to stay depressed since the start of the recession. So we have to consider whether gold can be differentiated from other commodities in the present situation.
The obvious difference between gold and other commodities is that gold is not just a commodity – it’s also a perceived store of value. Other precious metals like silver and platinum are also used as investment vehicles, but gold is the most popular, against which currencies are measured.
Currencies have in nearly every country declined steadily over the last hundred years or so. Inflation may not be the beast it was in the 1970s, but it’s still there, and it always has been since modern banking and finance evolved. Now we have a situation where both the US and the UK governments have borrowed billions to bail out the banks, and engaged in “quantitative easing”, i.e. money creation, in order to try and spend-borrow their way out of the recession.
What is this going to do to the price of gold? Gold is scarce, which is one of the reasons that it is perceived as valuable. Nearly all the gold currently mined goes into industrial uses and personal ornamentation. Very little is added to the coffers of national exchequers.
The price of gold therefore has to rise from its present level. Most other things will also rise in price over the forthcoming months and years as the increased money, with no increase in production to justify it, comes into circulation. With all the stock trading charts showing depressed prices, and inflation reborn, gold, the traditional refuge of capital in times of uncertainty, will most likely at least double in value over the next few years.
In summary, gold will almost certainly out-perform the indices of the world’s stock markets in the short to medium term future.
Philip Gegan
