Gold has lately become an almost-bubble asset. Recently it has reached new highs, and the easy but half-baked explanation is that it’s because the U.S. dollar is weak.
Gold bugs have some reason both to be afraid and comforted. The IMF has announced it would sell 400 tons, or 1/8 of its total holdings, if only so the proceeds can be used to generate income to pay staff salaries. But the IMF sale comes amidst a five-year agreement among European central banks also to sell gold, but only for limited amounts.
It is almost as if many of the largest official holders of gold (i.e. central banks), including the IMF, are saying that while gold is passe as a reserve asset, they really don’t want to let it go. Better to keep gold’s ownership close to their collective vests is the apparent message.
So who recently came to dine at the gold ownership club table? India. And folks thought it would be China, given some talk in the media that China might be thinking it has too much US dollars in its reserves.
The last time gold made important highs was in the early 1980s, amidst global inflation, and just before Volcker decided to tighten US monetary policy. It isn’t quite the same today, though gold has been a Johnny-come-lately to the run-up in 2008 in oil prices.
So, does this mean gold is headed for a fall? Not while the IMF is telling its membership to adopt loose Keynesian policies and the global recovery is fragile. Ironically, gold is also driven by prosperity in the Middle East and Asian countries. So a firm global recovery is not necessarily bad for gold, even if by then just about every central bank will be talking about its “exit strategy” from old-fashioned Keynesian stimuli.
And of course, the Buffett-PIMCO bear-dollar story helps prop up gold too.
So there you are. Gold seems to be just fine where it is. It can’t go up by much because the world economy isn’t exactly roses. It can’t go down much because the world is awash in paper money because of Keynes. And central banks are still hung up on owning this so-called “barbaric relic.”