Shock And Au: Hedging Against Fear

The original ‘money’, gold has always been highly valued for its brilliance, malleability and purity. King Croesus is credited with the invention of the first gold coins, which remained a primary currency across the globe right up until the beginning of the 20th century. The ancient kings succeeding him were also probably responsible for the very first cases of inflation after they began adding lead to gold coins – enhancing the royal money supply but simultaneously reducing the coins’ value. In times of war, pestilence and political instability, gold has been jealously hoarded as protection against the vicissitudes of life.

Not much has changed. Today, gold’s popularity and hence value continues an extended bull run which saw a new record high this month/in April, when spot gold breached $1,500 per troy ounce for the first time. Can the price of this most treasured commodity possibly continue to climb and does owning gold really protect wealth against the ravages of inflation? Perhaps most pertinently for investors, does gold’s long boom presage a decline in value: are we now entering the late stages of a ‘gold bubble’?

Economic commentators are certainly divided about the future direction of gold prices. Some point to the perfect correlation of all the factors likely to increase the precious metal’s desirability: Inflationary threat and currency debasement abetted by massive quantitative easing, widespread economic instability and geopolitical unrest in the oil-rich Middle East and North Africa, together with widespread record-low interest rates which have left savers with few options. Given all these contributory factors we are witnessing a classic reaction to fear and uncertainty – investors buying gold, hoarding gold and waiting for some ‘normalization’ to appear in market conditions. As Mike McCudden, head of retail derivatives at Interactive Investor confirms: “When there’s any sort of market calamity you often see an uptick in gold as it’s regarded as a safe haven. This makes it an ideal tool for hedging against these events.”

…Continued on Shock And Au: Hedging Against Fear