Gold may not be money, as Fed Chief Ben Bernanke said Wednesday, but it continues to be a decent bet, at least on paper, so far this year. Just please don’t let the headlines infect you with yellow fever yourself. Gold, in isolation, is just a form of speculation. And fever, remember, is a symptom of disease.
Inflation fears and instability in the euro zone helped push the price of gold up to nearly $1,600 an ounce at one point Thursday on the New York Mercantile Exchange and it settled at a new all-time high of $1,589.
Not adjusted for inflation, that is.
As we’ve said before, if gold is considered to be a hedge against inflation, then you’ve got to factor that in. For the record, gold topped out at about $850 an ounce back in 1980. That’s the equivalent of around $2,300 in today’s money. So the yellow metal still has a long ways to go before hitting real (not so-called nominal) record highs.
Nevertheless, it’s clear investors and central banks around the globe have a bad case of gold fever, according to the latest data from the World Gold Council, a gold industry association.
Gold prices ended the second quarter up 4.6 percent vs. the previous quarter, helped by the fact that the average price grew nearly 9 percent to $1,506 an ounce, according to WGC’s latest quarterly report.
Where did all this demand come from? Investors, partly. Gold-backed exchange traded funds, like the SPDR Gold Trust (GLD), among others, had net inflows adding 46 tonnes of gold worth more than $104 billion during the second quarter.
The world’s central banks, especially in emerging markets, are also hoarding gold as they diversify away from the incredible shrinking dollar. (And the possibility of Uncle Sam defaulting on its dollar-denominated obligations.)
Total central banks’ net purchases so far this year have already passed the level seen in all of 2010, WGC reports. “Emerging markets banks continue to be the main driving force, led this quarter by Mexico’s 100-tonne increase in its reserves,” WGC says.
China has also been a major player in the gold market, as we noted in an earlier post. Physical gold delivery at the Shanghai Gold Exchange came to more than 205 tonnes during the second quarter, WGC says. That’s an increase of about 15%, or more than 25 tonnes, vs. last year’s second quarter.
However, as good as gold has been, Bernanke is correct when he says gold is not money. Just try to buy a Slurpee with a Krugerrand. It’s also worth mentioning that Warren Buffett, who knows more about investing than you do, hates gold. It offers no yield, for one thing, and has become far more dependent on macroeconomic fears and speculative trading than on any traditional demand.
As we’ve said before, an indexed, properly allocated and regularly rebalanced portfolio — which may or may not include some gold — is an investment strategy you can live with and perhaps eventually retire by. So please just let the pros trade the gold.
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