Actually there are probably three hundred or three thousands things for investors to worry about today, but there are three clusters of current events that I would link to the recent surge in gold. Two of them are political in nature -- our leaders aren't making an effort to clean up the fiscal mess they've made -- and it's unlikely they'll be settled any time soon. Because it has no fundamentals to measure, such as a dividend or interest coupon, gold makes for a funny investment that is driven solely by investors' state of mind. But with so many threats to paper money, we might see a new leg in the price run of gold that started with the onset of the financial crisis.
Thank you Financial Times. Click to enlarge
First is the surge in oil prices. Higher oil leads to higher inflation and less valuable paper money, and investors take that as a sign to buy gold. Brent crude went above $125 today, which is a high for about the last three years. Production in Libya is down 80 percent because of damage to oilfields (for which neither Colonel Qadaffi or Libyan rebels are claiming credit). Reuters notes that after the war in Kuwait, full-scale production was not restored for about two years, so that supply could be off the market for a long time. Reuters also cites that delayed elections in Nigeria also are spooking the oil market.
Second is the ongoing financial strife in Europe. Portugal has asked the European Central Bank and International Monetary Fund for $110 billion of aid for its banks, which would bring the number of sovereign bailouts to three (following Greece and Ireland). And inflation is picking up in Europe. None of this is good for the economy or the Euro, but it does add to the list of reasons to buy gold.
Third on my list is the embarrassing political wrangle in Washington, which is supposed to be aimed at reducing the U.S. federal budget deficit, but has turned into a battle on social causes. The amounts being haggled over at the moment are small, but Congress seems more interested in the headlines they can generate than getting the job done.
In a year or two, lawmakers will have to start working on enormous cuts to large parts of the budget. Their inability to address today's small adjustments in a serious way surely is a worry to the bond markets, and the eventual damage that excessive federal spending will do to the U.S. dollar, inflation and interest rates are likely another reason investors are turning once again to gold.
Last, and this is not really a worry but more a market reality, gold has again become a momentum trade, meaning that the rise in the price feeds on itself. There isn't all that much gold out there, so it doesn't take much additional interest to keep it moving. And for the worries, there is no end in sight.