A golden future?
In the aftermath of the global financial crisis of 2008, central governments around the world have enacted monetary and fiscal stimulus programs to stave off banking system failure and severe economic downturn.
This has made for a liquidity boom, which, generally speaking, triggers a positive reaction in markets overall. This expansion in global liquidity explains most of the recent upward trend in the stock, bond, commodity and precious metal markets.
But what do these stimulus payments mean for the global inflation outlook? And is gold still the best inflation hedge, as it is commonly perceived to be?
It is clear that these stimulus payments will have some effect on global inflation, however, the extent to which this occurs varies from country to country. A recent study from the Bank of Canada has shown that gold price movements are a significant predictor of inflation across several countries up to two full years in advance. So they are certainly an indicator to watch given the rally in gold prices throughout 2009.
And whether gold is still a suitable hedge in these inflationary times is the subject of constant and intense debate from economists.
In what is widely considered to be the leading empirical study of gold, Roy W Jastram’s The Golden Constant, Jastram’s work rigorously analyses the purchasing power of gold in England and the United States from 1560 to 1976. The Golden Constant demonstrates conclusively that gold holds its purchasing power remarkably well over time, and that while it is not money in the traditional sense, gold has the ability to act like money in times of economic turmoil.
In his Speech to the US Senate Banking Committee in May 1999, Alan Greenspan, the then head of the US Federal Reserve, explains this point succinctly:
... gold still represents the ultimate form of payment in the world. It's interesting that Germany could buy materials during the war [WWII] only with gold. In extremis fiat [hard currency] money is accepted by nobody and gold is always accepted and is the ultimate means of payment…
With the global economy expected to remain weak for the better part of 2009, the need to seek safe havens to weather the financial storm continues. Under normal conditions, these safe haven investments would include land and real estate. These assets have intrinsic value; their value will never fall completely to zero. But with real estate prices still falling around the world, gold still maintains it's position as a safe haven.
Sources:
Greg Tkacz (2007), Working Paper/Document de travail 2007-35, Gold Prices and In?ation. Published on www.bankofcanada.ca (accessed 17 July 2009)
Jastram R (1977) The Golden Constant, Wiley Publishing, England.
Greenspan A (1999), Speech to US Senate Banking Committee May 1999
Published on www.the-privateer.com/greenspan.html (accessed 17 July 2009)