Gold is back in fashion.
The price of gold reached a 27-year high on Friday.
At $737 an ounce, it surpassed the previous peak of $730, which was posted in May. However, it was still some way short of the all-time record of $850 per ounce, reached in December 1980.
Uncertainty in the global financial markets, precipitated by the US sub-prime mortgage crisis, has been blamed for the rush to buy gold. The trigger was said to be the unexpected half point cut by the US federal reserve.
Demand for gold tends to rise at times of economic uncertainty, because its value is seen as robust when compared other, more volatile forms of investment. The effects of the US crisis have reverberated around the global markets, and led to the banking crisis in the UK, where the bank of England had to promise to bail out Northern Rock to assuage customers’ fears about the security of their savings. The collapsing dollar and concern that central banks are being remiss in their duty to keep a lid on inflation have, along with Northern Rock’s travails, all contributed to the run on gold.
The turbulence in the financial markets has led some analysts to wonder whether shockwaves from the US crisis might ultimately cause a worldwide session. However, problems localised to the US are much less likely to have such dramatic ramifications for the wider world than they used to.
The phrase ‘When America sneezes, the world catches a cold,’ no longer holds as true as it once did. True, the American economy is still the largest in the world and any slowdown there will certainly affect growth rates around the world. But the US is now only one of a number of powerful economic hubs.
The so-called BRIC countries – Brazil, Russia, India and China – are all justifying their categorisation by Goldman Sachs as the countries most likely to challenge the hegemony of the US. China and India, which are posting double digit growth year-on-year and are home to a third of the world’s population, are consuming and exporting so much that any US slowdown does not starve the world of customers and producers like it used to. Asia Pacific economies also increasingly provide a counterweight to American dominance, reducing the likelihood that if the US goes down, everyone else goes down with it.
Although the price of gold has soared, this is not necessarily a harbinger of impending economic disaster, and is more likely the result of speculation than fear.
