Traders usually know two things about as an asset class – it is a reliable store of value, and it is a safe haven in times of trouble.
Put slightly differently, one would expect gold prices to rise when other assets, such as cash, are losing their value, perhaps because of inflation. Similarly, political and economic turmoil would be likely to stoke demand for gold.
All this is true, up to a point, but there are caveats. More on that in a moment.
A turbulent period
First, the current state of the gold price.
It has not been a good three months for bullion. From $1,274 an ounce in late June, it is currently just above $1,200. Shortening the timeframe to the last month gives a brighter picture, given that the price was down at about $1,185 in late August.
But widen it out again to take in the past year, and the story is once more one of decline, from about $1,312 an ounce.
But bear in mind that gold has a competitor, both as a safe haven and as an international monetary asset – the dollar. Once, they were intimately bound together, with $35 being always and everywhere worth an ounce of gold, and vice versa. That link is long gone, now the two assets tend to move in opposite directions.
Look at the dollar chart for the last year, and you’ll see the dollar holding steady at about €0.85 and about £0.75. The US currency has been buoyed both by the strength of the American economy and the steady rise in US interest rates.
What is more, gold is actually priced in dollars, meaning a burst in US inflation usually leads to a higher gold price. America’s inflation is currently low by historical standards.
US volatility may support price
So, is gold a good investment? What sort of outlook for bullion can traders expect in the near term? The first point to make is that, while under pressure and trading in what would seem to be a downwardly sloping pattern, the gold price is far from being in the dire straits seen towards the end of the last century – with the Cold War over, the yellow metal languished in the $200-$300 range.
Finally, a slowdown in the American economy could well put further interest-rate rises, disappointing dollar bulls and burnishing gold’s attractions.
It may be useful for traders to remember that the “store of value” argument in favour of gold as an investment works, but over long timescales. The World Gold Council has that an ounce of gold buys the same number of loaves of bread today as in the reign of the Babylonian king Nebuchadnezzar.
He reigned 2,500 years ago, and most traders don’t have that much time.