Gold: Currency Or Confused Commodity ?  

Alan Kohler at the Business Spectator has a look at the soaring gold ("the commodity of craziness") price and notes that its only worth what everyone thinks its worth (just like every other tradeable asset really) - Gold fever looks incurable.

It’s worth remembering that gold has broken through $US1000 an ounce again (actually it fell back to $994 this morning, but close enough) because of speculation about what might happen to the financially inconvenienced United States, rather than actual demand and supply of the stuff in question.

That’s not to say gold won’t keep rising, or that the price won’t be underpinned by investment demand – it will. But underlying demand is weak and getting weaker, and supply is on the rise – big time.

Whenever the gold price reaches these sort of levels people lose their enthusiasm for draping it around the necks and adorning their fingers with it, and gold miners start buying extra trucks and digging new declines to that orebody they’ve been eyeing off for a while.

Demand in India, the world’s biggest jewellery market, fell 31 per cent in the second quarter and in Turkey, the second biggest market, it fell 54 per cent.

Gold is the commodity of craziness. Gold miners, even those wearing suits in the city, are all possessed by the ghosts of wild-eyed, bearded prospectors from the gold rushes of the 1850s; gold investors are that unique breed of incurable optimists who don’t want to be paid any income on their capital; and big gold bling wearers are possessed by Mesopotamian princes and princesses. ...

The London Telegraph yesterday quoted Chinese officials as being “dismayed” by the prospects for the US dollar because of its policy of financing the deficit by printing money, and the United Nations Conference on Trade and Development (UNCTAD) has urged the creation of a new world reserve currency system replacing the dollar with a basket of several currencies.

These things do not mean China is about to dump US dollars – it can’t – or that the world is suddenly going to drop the greenback as the key reserve currency (UNCTAD is not that influential). But the trend is clear.

This has some gold analysts calling $US2000 an ounce on the price over the next few years. But while there’s no doubt the gold will continue to be underpinned by the demise of the dollar, it is not a currency. I can’t go into JB Hi-Fi with a lump of it and buy a TV.

Central banks around the world own about 26,000 tonnes of it, which represents 8.5 per cent of total reserves, but it’s not legal tender. It’s just a commodity they got stuck with because it used to be a currency a long time ago and will never be again.

So gold is also the commodity of confusion: is it an investment safe haven or just a commodity? Answer: it’s whatever everyone thinks it is, and right now it’s a haven.