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MARKET COMMENT
By
The fear of uncertainty has driven some investors to seek refuge in gold. This desire to find a safe haven for their money has pushed the price of gold from $280 an ounce at the start of the year to almost $320 today. However those who believe that gold can be a hedge against the uncertainties of life fail to appreciate that the quest for stability cannot be found in the precious metal. Indeed gold is meaningless by itself and hoarding gold does not by its very nature help to either create wealth or indeed store wealth. Peter Bernstein in his book "The Power of Gold" chronicles the history of the yellow metal across the passage of time. Throughout history gold has played two principal roles, namely that of adornment and also of money. But to be useful as a form of money gold must be easily transferred from one party to another. In other words it must be readily moved from the hands of a buyer to a seller or from a lender to a borrower. However that function is already in place with internationally tradable currencies. So to suggest that gold can be a safe haven would imply that the major currencies that include the dollar, the euro, the pound, the Swiss franc and the yen have failed to be acceptable as a means of payment across international borders. Nothing of course could be further from the truth. Yet fear today, like it did in the late seventies and the early eighties, has prompted worried investors to switch their investments into gold. At that time severe inflation, the high price of oil and political unrest drove the price of gold from just under $250 an ounce to the dizzy heights of $850. Those who bought in at that higher price were soon nursing heft losses when gold prices plunged back down to below $300 an ounce. The reasons for the fall were simple. In times of high inflation bond yields are commensurately higher and company stocks would also provide investors with attractive dividend yields. Gold on the other hand pays no income and additionally incurs storage cost. Neither of which makes gold an attractive investment. So, as beautiful as the yellow metal might be, gold is neither a hedge against inflation nor a protection against uncertainty. But don't take my word for it and take a look at what Peter Bernstein has to say about the metal that has intoxicated man for centuries.