TWO weeks ago, Federal Reserve chairman Ben Bernanke was giving testimony to the House Budget Committee. In the Q&A session that followed, he was asked, among other things, about the price of gold. “I don’t fully understand movements in the gold price,” he replied, going on to say that he felt its rise was an anomaly, since it was “doing something different from the rest of the commodity group”.
Bernanke was being rather guarded in his response. While he conceded that gold’s strength could be a sign of investors moving from assets perceived to be risky to those considered less risky, it was his old boss Alan Greenspan who was far more candid. Last week he wrote in the Wall Street Journal that “the inexorable rise in the price of gold indicates a large number of investors are seeking a safe haven beyond fiat currencies”.
Gold continues to climb against all major currencies. After its convincing rises last week, it broke a fresh (inflation-unadjusted) record yesterday, rising to $1,265. Yet gold gets bad press from some in the investment community. They explain that gold doesn’t yield anything. It pays no interest and costs money to store safely (this cost is also priced into “paper” gold – exchange-traded funds and futures). They also say it is a bad hedge against inflation – reminding us that had you bought in 1980 when gold hit $850 per ounce, you still wouldn’t have broken even on your inflation-adjusted holding.
As with any asset, there are good times and bad times to buy and gold has been one of the best-performing assets over the past 10 years. How can this continue? In times of economic uncertainty it has a few key things going for it. As a store of value and ultimate medium of exchange it is divisible in a way that a work of art isn’t; it is durable, unlike soft and agricultural commodities; it is portable in a way that property or copper isn’t; it is consistent, unlike gem stones. Finally, it has served as money for over 2,000 years, while the dollar (in its current fiat state) has existed for less than 40. I know which I prefer.