If gold were to be used for ornamental and industrial purposes, the reason that makes it a commodity, its value would most likely be in the region of US$600 an ounce, some consultants and researchers contend. With prices more than three times that level, well beyond the predictions of even the most bullish of financial advisers, there has understandably long been talk of a bubble in some quarters. Speculative buying by investors, and funds that make it easier to trade the precious metal, are largely behind the surge. But there is a fundamental reason driving them: they lack confidence that governments can solve the world's economic problems.
The price of gold and risk go together. When there is economic uncertainty, it goes up and when financial stability reigns, it is flat. On August 23, it reached a historic high of US$1,913.50 an ounce and although it has since dropped back, there is still a possibility records will be broken again. Circumstances will stay this way as long as investors remain nervous about the economic environment.
They have every reason to feel this way. Three years after the global financial crisis, the governments of the US, European Union and Japan continue to struggle with managing their economies. Gold rose in value by 12 per cent last month amid concerns by investors of a debt crisis that would lead to a double-dip recession. Stock markets are jittery again, interest rates remain low and currencies are in the doldrums. It is easy to see why many people regard gold as the safest of havens.
Whenever prices are at record highs, whether for commodities, real estate, stocks or other investments, those thinking of buying in will naturally exercise caution. Gold, unlike cash in the bank or bonds, only gives a return when sold for more than it was bought for. Authorities well know that it is not in the interests of business or consumers that it remains at precipitous highs. With the policies of governments and central banks so crucial to its value, there is every reason to step back and put the matter in perspective, thinking of gold as a commodity rather than the best of investments.