As Comex gold hit a fresh record high, Societe Generale commodities skeptic Dylan Grice — of the long-term return on commodities is zero fame — wrote a stirring paean to gold in his latest research report.
Marked by his characteristic erudition, with references to gold's use as a hedge in the world of antiquity, Grice's report is worth reading and thinking about.
In a nutshell, Grice owns gold because he's worried that developed economies are rapidly heading towards insolvency. This could cause a political crisis of such magnitude that Western societies might actually be willing to embrace painful, contractionary measures – which would be the signal to sell gold.
This is a good explanation for the sustained run-up in gold. But it doesn't answer (nor is it even intended to address) what investment might make sense for today.
The run-up in gold has coincided with an economic crisis marked by fiscal irresponsibility, weakening currencies (above all, the dollar and the euro), low interest rates and quantitative easing (i.e., printing forests worth of dollars).
Massive government spending ("trillion" as the new "billion"), combined with a hot money press, has kindled fears of inflation — which only general economic weakness has so far held in check.
Now that commodities are soaring — with oil over $106 a barrel, and both the Producer Price Index and Consumer Price Index dramatically up in February — it's no wonder that gold, the classic inflation hedge, has reached new highs.
This makes me wonder what the next major market shift will be and how to play it. Could inflationary pressures finally force central banks to raise interest rates? I believe such moves could be a significant market game changer.
By keeping rates at historic lows amid the economic crisis, Fed Chairman Ben Bernanke understood that wounded financial institutions would be able to make easy money that could enable them to recapitalize, and that people with money would turn to the stock market for capital returns, creating a wealth effect.
