Gold prices meander after ECB’s reluctant statement

In the Lead: “PGMs = Potentially Great Movers”

Also down in South Africa, labor strife continues to cast a fairly dark shadow on the output in the PGM space. As recently reported here, Impala Platinum (the planet’s second largest platinum producer) fired more than 17,000 workers during what the firm has called an “illegal strike.” And then, there remains the subject of the possible nationalization of that country’s mines; a thorny- and as yet unresolved- issue and one that will not come to be addressed without contentiousness.

While we are on contentious subjects, we might as well tackle a couple of fairly old but frequent ones. The heated debates on whether or not gold is an effective inflation hedge and on whether the Fed is or is not doing its job continue to rage on, and they continue to show sharply divided camps. This morning, we bring you a couple of stories from the less…”conventional” side of these issues. For the sake of balance (and a bit of myth-busting), you know...

A just-published by Credit Suisse study by Messrs. Marsh, Dimson, and Staunton of the London Business School argues that owing to its price volatility, gold has not been able to play an effective role in protection against inflation. The study is not referring to the past nine months of volatility in bullion prices; it covers 112 years of market history. Since 1900, the real return on gold has been 1.1% (in sterling) as compared to the 5.4% annualized return offered by global equities.

Do note that the LBS study does point out that “Gold is the only asset that does not have its real value reduced by inflation” and that “it has a potential role in the portfolio of a risk-averse investor concerned about inflation.” However, one would be well-advised not to look at the precious metal for “return” in the sense that “this asset does not provide an income flow and has generated low real returns over the long term. Gold can fail to provide a positive real return over extended periods."

Gold is many things to many people, but ignoring such math as shown above can prove unwise. Perhaps the individual investor’s focus should remain on the fact that when gold is added to a portfolio of conventional assets (and in a not too over-weighted percentage) the overall performance of that basket of assets is slightly enhanced, whilst its overall risk profile is slightly decreased. Gold is a good diversifier, and a good tail-risk mitigator. As for being a ‘panacea’ for what ails the world, or certain other miraculous things, well, surely studies such as the above will keep coming.

As for the Fed, while certain would-be US Presidents currently in the heat of the election campaign would like to incarcerate Ben Bernanke and slap him with a charge of “treason” (punishable by execution), the numbers that Mr. Bernanke’s Fed has been able to recently draw on the US economic chalk board (again, those pesky numbers and math) are proving him “dead” wrong.

Inflation supposedly now demolishing America and your wallet? The imminent death of fiat currencies and the entire political system?

Perhaps you’ve been parsing too many shadowy statistics: “More than a year after Republicans from House Speaker John Boehner of Ohio to presidential candidate Ron Paul of Texas warned that the Fed’s second round of asset purchases risked a sharp acceleration in prices, the surge has failed to materialize. The personal-consumption-expenditures price index rose 2.4 percent for the 12 months ending in December, near the central bank’s 2 percent target.”

US unemployment at 10 or 20 percent by now, and the US economy shrinking into oblivion? Perhaps you have been the recipient of the wrong news (-letters, that is): “The unemployment rate fell to 8.3 percent in January, the lowest since February 2009, according to a Labor Department report last week. Payrolls rose by 243,000, exceeding the most optimistic forecast in a Bloomberg News survey. The U.S. economy is forecast to grow at a 2.3 percent rate this year, up from 1.7 percent in 2011, according to a Bloomberg News survey of 70 economists last month.”

Not exactly the “rap sheet” for which one is sent “up the river.” Certainly not when, even in the wake of such figures, the Fed Chairman remains of the opinion (spoken just yesterday) that the US job market, while progressing along, is relatively far from being given a clean bill of health.

Until tomorrow,

Jon Nadler

Senior Metals Analyst Kitco Metals Inc. North America


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About the Author
Jon Nadler Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America
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