Gold – safe as houses?

For a number of years Gold has been championed as having store value (one of the functions of money) and a safe haven for investors. On Friday 16th September Gold prices hit a high of US$1,920 per ounce but by Monday 26th Spetember it had dropped to US$1.534 – a fall of 20%. So why has this commodity become a risky asset to hold. It seems that when economic conditions become really serious that gold gets ‘hit’ – according to one hedge fund manager “It is hard to say that something that can fall 15% in 3 days is a store value.”

However, the same happened in 2008 when Lehman Brothers went under. Gold appreciated in value quite rapidly as people sought a medium with good store value. But the contagion on financial markets that follwed saw Gold lose a lot of its value. To many this was a sign of the interconnectedness of world markets as asset values seem to move together in a crisis. Obviously these wide variations in price could be demotivating for the risk-averse investor. According to the Financial Times in London there are two significant questions that must be asked of Gold:

1. Does the recent fall mark the loss of haven status and the beginning of the end for gold’s decade-long bull market?
2. If the answer to one above is no, how long will it take for Gold to recover?

Warren Buffett quite rightly points out that there is some madness in digging up, refining and shipping the metal across the world, and burying it again in expensive vaults. Some have argued that its value is founded on ‘human stupidity’ as it is something that is built on what you can dream up. So if everyone believes it has value then it will continue to be a store of value. However, with the quantitative easing and the recent loans to banks in the euro zone there is a greater chance that investors will be seeking an alternative to money as they try to maintain the purchasing power of their assets. There is a lot of instability in the market place which will no doubt keep Gold prices pushing towards that US$2,000 target once again.

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