One excellent reason not to buy gold used to be that other alternative safe investments offered much higher yields. How times have changed.
Gold still comes with costs and no cash return. But at today's prices, so do a substantial portion of government bonds, including all German debt with maturities of five years or less. Half of all outstanding government debt yields less than 1 per cent, Bank of America Merrill Lynch economists calculate. Many yield-hungry investors might think gold's zero is not significantly inferior, after adjusting for the risk of bond-devaluing inflation.
Fixed-interest investments are set to become more attractive, and gold less so, once the US and the UK start to increase policy interest rates. However, those rises keep getting delayed, thanks to rampant disinflation. Fears of rate rises have therefore become less of an immediate drag on gold prices.
There are still good reasons why gold could fall back from its January 6 level, a three-week high of $1,214 an ounce. One is the broad-based strength of the dollar. In normal times, a rising greenback tends to be accompanied by a decline in the yellow metal. But this relationship can break down when investors are stampeding into safe assets, as has been the case this week.
At least one traditional reason to buy gold, as a hedge against extreme developments, still looks compelling. The unclear implications of the sharp oil price fall, the political tension in West Asia and in the European Union, and the uncertain effects of possible deflation on the financial system are all good reasons why investors might want to hold some gold in their portfolio. The latest rally was partly prompted by renewed fears of a forced Greek exit from the Eurozone.
If catastrophes are avoided, gold may eventually go back to the declining trend which started after the price topped $1,900 an ounce in 2011. But there are at least a few brakes on its descent for now.
Gold still comes with costs and no cash return. But at today's prices, so do a substantial portion of government bonds, including all German debt with maturities of five years or less. Half of all outstanding government debt yields less than 1 per cent, Bank of America Merrill Lynch economists calculate. Many yield-hungry investors might think gold's zero is not significantly inferior, after adjusting for the risk of bond-devaluing inflation.
Fixed-interest investments are set to become more attractive, and gold less so, once the US and the UK start to increase policy interest rates. However, those rises keep getting delayed, thanks to rampant disinflation. Fears of rate rises have therefore become less of an immediate drag on gold prices.
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At least one traditional reason to buy gold, as a hedge against extreme developments, still looks compelling. The unclear implications of the sharp oil price fall, the political tension in West Asia and in the European Union, and the uncertain effects of possible deflation on the financial system are all good reasons why investors might want to hold some gold in their portfolio. The latest rally was partly prompted by renewed fears of a forced Greek exit from the Eurozone.
If catastrophes are avoided, gold may eventually go back to the declining trend which started after the price topped $1,900 an ounce in 2011. But there are at least a few brakes on its descent for now.