Is Gold a Hedge Against Inflation?

Gold’s price behavior is a reflection of a built-in perception of uncertainty and nervousness regarding all currencies and the current global socio-economic state. From a low of $250 in 1999 to the current price of about $1400 per troy ounce, gold is the only perceived store of value that investors have come to accept. The inverse correlation to the dollar that has somewhat held true for quite a while — gold and dollar values move opposite of each other — has been lost as of late, and the metal has risen on days when the greenback lost against all other currencies.

From a supply and demand perspective, consumption by the precious metal major market – retail jewelry — has declined, according to the World Gold Council, an organization funded by the world’s leading gold mining companies. Total gold demand in the second quarter of 2010 rose by 36%, largely reflecting strong gold investment demand compared to the second quarter of 2009. In Dollar terms, demand increased 77% to $40.4 billion. However, global jewelry demand declined 5% from one year ago despite China’s increase of 5%. In India, the largest retail market in the world, had a decline of 2%. The key driver behind the spike in price is due to investment demand with an astonishing 118% increase from last year, with the largest growth coming from the Exchange Traded Funds segment, which registered 414% growth. It is starting to look like oil between 2007 and 2008, but when many thought that oil was high at $100, it proceed to shoot up to $150, before it fell.

Why gold and not something else? Rarity, acceptability, usability, portability, and liquidity. But isn’t gold a hedge against inflation? Never was and will never be. It’s a hedge against instability, and a consensus exists that gold, for lack of a different asset, is the asset to hold due to the uncertainty that surrounds the markets, which are affected by the constant flux of less than clear economic policies at home and abroad. Positive consumer sentiment in conjunction with easy credit, cause inflation, and if inflation was the issue, the value of hard assets, such as land and housing, would be rising – and that is not the case.

I know about the guy that goes on TV and shows a shrinking dollar and then adds the dramatic clink-clink sound of security to the message. Oh, and he has been in gold for 10 years, except that ten years ago he forgot to mention it, when prices were a lot more accessible. But doesn’t your dollar buy you more house than it did in 2007? And by the way, the unscientific milk index has dropped from around 4$ a gallon in 2008 to the latest special of 99 cents for the same jug. Meanwhile, the price of gold is still rising, completely oblivious that inflation is not around – but global instability is.

Unfortunately, the rapid rise in the value of the commodity has attracted less than scrupulous operators, that rely on misinformation to trick the public into buying their inventory of extremely over priced gold coins, and many unsuspecting individuals are being taken to the cleaners. Whether the value of gold will rise to the stratosphere is an unknown, and I wouldn’t bet on a price level of any kind. Thus far, the price appears poised for further gains, but once the economic future of the major global players is well-defined – whether it is a positive or negative outcome – gold prices will subside because certainty will clear the air, even if sovereign default is the end result. Ultimately it’s only a commodity.

Lastly, gold cannot be money because the supply cannot grow at will to keep up with population and productivity. Only its value can change — up and down — relative to currencies, and the mining market supply coupled with demand from investment, industrial, and retail markets will determine the valuation. Shouldn’t platinum be money? The higher value of about $350 over gold, would translate into lower storage costs for Central Banks and everyone else. How about rhodium at $2,300 per ounce, a member of the platinum family?

The first gold coin used as money was the ‘florin’, minted by the Republic of Florence in the 13th Century, now modern Tuscany in Italy. Yet gold had been around for a little while longer. Gold was also used as money in Rome way before then, but since the mines were in North Africa, the metal lost its appeal as currency due to supply issues, and silver was used instead. In addition, gold is impractical to use as money because an extremely small one gram coin, if in existence, would be something less than 1/16 inch in diameter, and would be worth over $40 at today’s price. Do I have to buy 20 loaves of bread at a time? Let me pay you with this tiny golden speck.

Gold offers opportunities as an investment, much like other commodities, just not for the reasons that are commonly given. And silver has outperformed gold over the last 10 years.

Author: Carlos X. Alexandre
http://seekingalpha.com/article/236312-is-gold-a-hedge-against-inflation-not-really?source=feed

So said Nehru to Eisenhower

Indo-Pak issues, including Kashmir, can be sorted out only through direct contact between the two countries and not through outside mediation, wrote Jawaharlal Nehru in his 1958 missive to the US President

IN HIS letter dated May 14, 1958, US President Dwight Eisenhower had expressed concern over the economic problems of India and Pakistan “during the last few years” and “admired the resolute manner in which both the countries have tackled the complex difficulties facing them”. However, he found it a “source of real concern” that the “effective economic development of both countries is being hindered by the continued existence of unresolved political and economic issues” and that both the countries were “devoting increasing amounts to their defence budgets at the expense of development”. Emphasising his deep personal concern with this problem, he considered it necessary for both the countries to find “mutually acceptable solutions of the major outstanding issues” and for this purpose, he added, he would be “glad to designate a special representative to visit India” if India agreed to it. Excerpts from Prime Minister Jawaharlal Nehru’s reply to the US President dated June 7, 1958, are reproduced below:

Dear Mr President,
Ambassador (Ellsworth) Bunker handed over to me on the May 16 your personal letter of May 14. I am grateful to you for your personal interest and concern in matters affecting us.

I had a long talk with Ambassador Bunker on the subject of your letter and pointed out to him the various aspects of the problems and the difficulties we had to face. I have no doubt that the Ambassador has communicated to you what I said to him on both these occasions.

I need not, therefore, write at any length now. But I am taking the liberty of enclosing a copy of the report of a speech I made in our Parliament on April 9, 1958. This deals with Indo-Pak relations and I attempted to give in it our approach to all the problems that had arisen between them. It deals, in particular, with the basic difficulty we have faced throughout these years in our dealings with Pakistan. There is also reference in it to the report that Dr (Frank) Graham made to the Security Council after his recent visit to India.

This speech will, I hope, make it clear to you how anxious we have been ever since Independence to have normal and friendly relations with Pakistan. We had hoped that the old conflicts and the policy of hatred and violence, pursued by the old Muslim League, which indeed had led to the Partition, would cease. It was obviously to the advantage of both countries to live in peace and friendship with each other and to devote themselves to their social and economic development which was so urgently needed to give a social content to our freedom and independence. Unfortunately for us and for Pakistan, our hopes were not realised and the Pakistan government continued to pursue that old policy of hatred and violence. Every government that comes to power in Pakistan bases itself on this policy of hatred against India. It is this basic fact that has to be recognised. In our opinion, the settlement we so ardently desire cannot come if this policy of hatred continues.

Military pacts and military aid have made Pakistan think in terms of coercing India. No self-respecting country can submit to this, much more so when that country is an aggrieved party and the other country continues to profit by its aggression. Unfortunately, the encouragement that Pakistan has received in the Security Council and elsewhere has led it to continue its policy of aggressive intransigence.

I realise fully that whatever the rights and wrongs may be in regard to these disputes, it is highly desirable to settle them and turn the course of events in the direction of peace and cooperation. I entirely agree with you, Mr President, that we should make every effort to this end. The question that arises is how best this can be done, because a wrong step may well lead to further difficulties. We have experience of trying to explore various avenues and making proposals for discussion, which found no response from Pakistan and led to further confusion. Indeed, we were made to suffer for every step that we took in the hope of facilitating a settlement. Despite all this, it is our desire that our two countries should resolve their differences and develop friendly relations with each other. To this end, we shall continue to work, but in doing so, we cannot submit to what we consider basically wrong, for any such submission would not solve any problem and would only aggravate our conflicts.

We have always been of the view that a settlement of our various issues with Pakistan can only be arrived at satisfactorily by direct contacts between the two countries. If third parties intervene, even though that intervention proceeds from goodwill, the position becomes entirely different. The aggressor country and the country against whom aggression has taken place are put on the same level, both pleading before that third party. It is this difficulty that has faced me in considering the proposal that you have made. Ambassador Bunker has told me that it is not intended that any person should act as a judge or umpire. Nevertheless, by whatever name the third person might be called, his intervention would tend to be regarded as of that kind and might well add to the present difficulties. Any visit of such a person could not be kept secret and the result would be greater public excitement.

Kashmir, canal waters and other matters in issue between India and Pakistan are the result, and not the basic cause, of Pakistan’s hostility to India. The atmosphere between the two countries has been worsened further by the incitement by Pakistan of subversion and sabotage in Kashmir and by speeches by Pakistan’s leaders advocating holy war against India. The Pakistani authorities have been responsible for frequent border incidents; early this week, seven of our border police were shot down in cold blood while negotiating under the white flag with their Pakistan counterparts along the border.

I have ventured to point out frankly the difficulties that face us. At the same time, I appreciate greatly your concern and I am anxious to explore all possibilities which might lead to happier results. I do not think, for the reasons I have given above, that a visit by a special representative, as suggested by you, would be helpful. May I again express my gratitude to you, Mr President, for your personal approach to these matters which concern us intimately. I know that you and your country mean well by us and we are happy that there has been a growing understanding between our countries.

(From The Selected Works of Jawaharlal Nehru, Vol. 42)
http://economictimes.indiatimes.com/opinion/comments--analysis/So-said-Nehru-to-Eisenhower/articleshow/6862680.cms