The Really Useful Gold Thread

From The Sunday Telegraph today:

Equities aren't as good as gold

By Terry Smith (Filed: 29/12/2002)

Well, it's nearly time to say farewell to 2002. It was hardly a vintage year for investment. Equities experienced a record equalling third down year in a row. The FTSE100 was down by 27 per cent. The S&P 500 has lost 25 per cent of its value, and the Nasdaq dropped 27 per cent.

But the performance of one asset class was particularly intriguing: gold. Having been in a 20-year bear market, gold this year has risen from $279 to $350.

What may be most interesting about the rise in the gold price is not how we might profit directly from it - to which the answer is buy the world's largest unhedged gold producers' shares - but what it implies about other financial assets.

Gold is normally denominated in US dollars, a currency which has not been strong lately. But the strength of gold may indicate that every major currency wants to go down: the dollar, yen, euro and sterling.

Each of the economies is suffering an economic slowdown in the aftermath of the unwinding of overcapacity from the TMT bubble and a worldwide lack of pricing power, or deflation.

And behind all this lies a single colossal force: the emergence of China as a super-efficient economic superpower. Of course, all the currencies cannot depreciate at once to keep their industries competitive, since they are priced relative to each other. But they can go down relative to a commodity whose value does not change.

Since this is the festive season it might be as well to recall that one of the Three Wise Men of legend brought gold as a gift.

If he had buried it in the ground more than 2,000 years ago, we could now dig it up (always assuming someone hadn't found it first and nicked it) and it would be exactly the same as it was at the birth of Christianity, untarnished by the passage of time or the elements. That is gold's greatest attraction: it is immutable.

So what we may see happening is not so much a rise in the value of gold as a fall in the value of most other assets, including the currencies it is denominated in, and alternative assets such as equities and property.

All in all, I fear that the continuing rise in the price of gold is not very bullish for almost anything else.