The story goes that, after sterling was devalued in the late 1940s, a very grand London hotel explained to an American visitor that it would no longer be accepting payment in US dollars. The trouble with dollars, explained the hotel manager, is that they were “all over the place”.
They weren’t, of course. It was sterling whose value had proved unpredictable – the dollar was blameless, and still fixed at the unchanging, universal price of $35 to an ounce of gold.
But this old episode raised interesting questions about cause and effect in relation to asset prices that remain to this day.
Price has not flatlined
Take the value of gold. It has been a long time since the price of a bullion was fixed to a dollar value, but recent price readings may give the impression that we are still in an age in which the International Monetary Fund (IMF) based its operations on a set dollar price or, at least, tried to hold gold within a narrow trading range.
This morning, gold traded at £1,287.20 an ounce, down 0.36% on the previous close. One month ago, the price was within 30 cents of today’s value, at $1,287.50 on 3 April.
Three months ago, on 3 January, gold traded at $1,287.95 – again, with $1,287 as the front figure.
However, it would be a mistake to assume from this that the price of gold has flatlined since the start of the year. A strong rally was seen in the middle of February, taking the price to a recent peak of $1,345.75 on 20 February.
Indeed, that was the highest the gold price has been since $1,347.90 on 19 April last year. Since then, the price went into a steady decline, hitting a trough of $1,176.70 on 17 August.
It bounced along the bottom until 28 November, when at $1,213.20 it began its ascent towards the February level.
Looking at the last 12 months as a whole, the price started at $1,336.60 on 3 April 2018, marking a near-4% decline to today’s value. Even that is not especially dramatic, and suggests anyone who bought or traded gold during the period would probably have been well advised to hold on to it.
Rival safe-haven assets
It is tempting to see gold’s steady performance during the last 12 months as proof of the oft-cited claim by “gold-bugs” that bullion is a reliable store of value. But this would be to misread the situation.
Gold does indeed hold its value, but only over very long periods. Even the most ardent supporters of the “yellow metal” would not claim that it typically remains largely unchanged in value over just 12 months.
Just look at the performance between 2012 and 2013. The price closed at $1,664.00 at the end of 2012 and, 12 months later, had lost 27.6% of its value, closing at $1,204.50.
What gold traders need always to bear in mind is that bullion is priced in dollars, and the dollar is its greatest rival as a safe-haven asset. As with that hotel manager, you always need to look at which asset is affecting the price at any one time and which is the asset being affected.