Contrary to what its dizzying rise would suggest, gold is not one of the best performing commodities. It will, however, continue to be an alternative currency to the U.S. dollar as investors take a flight to safety, according to experts at BMO Harris Private Banking.
Admitting that gold has run too far too quickly, experts at the bank said investors will continue to hoard gold, and other precious metals, as a hedge against devaluing global currencies, particularly the U.S. dollar and euro.
“Gold is not trading on inflation expectations, it’s really trading as an alternative currency to the U.S. dollar,” said Paul Taylor, chief investment officer, BMO Harris Private Banking. “There’s the expectation that the reflation of the U.S. economy is not good for the U.S. fiscal debts and deficit situation.”
The Obama administration endorses a weak currency environment because “that, of course, makes [the U.S.], from a trade perspective, more competitive” but “annoys their trading partners to no end.”
Many investors are unaware that gold has been rising for 11 years now, said Michael Herring, investment strategist and managing director, BMO Nesbitt Burns. “It bottomed at around $252 in 1999 and has since more than quintupled. It’s actually not one of the best performing commodities in the complex.”
Oil bottomed at below $10 and it peaked at about $147 in 2008 and is roughly mid-$80-range right now. Copper has turned in a smashing performance over the same period of time. But gold gets the spotlight. “It is really the reflection of the change in monetary backdrop and the change in monetary response function that we’ve seen out of central banks, most particularly out of the Federal Reserve,” said Herring.
A deepening lack of faith in paper currencies has been driving investors globally to adopt gold as an alternative currency. “If you look at currencies around the world they are all faith-based initiatives,” said Herring. “They are all paper currencies backed by nothing.”
Global currencies have all lost value against a basket of goods at different rates and different times. And the biggest loser of value has been the U.S. dollar.
“I think there is a very large contingent of investors who recognise that the history of central banking over the last 100 years is one of consistent devaluation of the value of currency relative to the basket of goods,” said Herring. “I don’t think there’s any reason to believe that’s stopping. If anything there’s a risk that it will accelerate once again.”
Investors who either can’t afford gold or think it’s overvalued have been turning to silver — commonly dubbed the poor man’s gold. These investors, mainly in Europe, are the reason why the price of silver has really ramped in the last little while.
“With everything that’s going on with Europe, it’s reasonable to believe that Europeans are starting to hoard some silver,” he said.
It’s no secret that the euro is in bigger trouble now than any time since it was formed in 1999. European investors know that and are clutching at silver for support.
“I do think there’s some evidence that folks are seeing the real cracks in the foundation of the euro here and they are hoarding silver,” said Herring, adding that among these may be investors who think that gold has already made too much of a move or that the price of an ounce of gold is too high.
Some experts are going so far as to say the end of euro is nigh, at least in some of its current member states. Jack Ablin, chief investment officer, Harris Private Bank in Chicago is talking endgame. He said if the contagion of debt spreads, the central powers of the EU will cut troubled countries loose from the common currency.
These countries would revert to their pre-euro currency at a pre-set exchange rate, and be allowed to devalue that currency before being allowed back in at some future date.
“Right now, the euro-zone and the euro banks are in somewhat of a denial,” said Ablin. “They don’t want to take a haircut but I do think eventually we are going to see the (Greek) drachma or Irish pound devalue their way back to prosperity.”
Given that they’re all locked together in a single currency, it makes sense at least for now for EU citizens to cling to gold or silver or any hard assets, he said.
(11/23/10)