How Much Risk Is Gold Discounting?

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Given the fears swirling around the financial sector at the moment, the fact that physical gold, held either in person or in an "allocated account", carries no counterparty risk - and counterparty risk is as we all know, is at the forefront right now.

Gold's role as a hedge against inflation is unparalleled, although for much of the late 1980s and during the 1990s, following the Plaza Agreement that ushered in monetary policy, this philosophy was challenged in the west on the basis that it wasn't working. What was being overlooked, of course, was that in Europe and North America at that point inflation had been brought under control and gold was not, at that time, needed as an inflation hedge. In other countries where inflation was running much higher (or out of control - Turkey was a particular case in point), it was doing its job perfectly well.

With the markets now increasingly concerned about inflationary trends, gold has posted its credentials once more, quite separately from its role as a mitigator of financial and political risk. While inflation is nowhere near the levels of the early 1980s (in the first quarter of 1980, inflation in the United States was 14%), inflationary expectations combined with an unprepossessing growth outlook have reinforced gold's defensive qualities. In the United States, in China in particular and also in Japan real interest rates are negative and, therefore, holding gold does not incur an opportunity cost.

Given the fears swirling around the financial sector at the moment, the fact that physical gold, held either in person or in an "allocated account", carries no counterparty risk - and counterparty risk is as we all know, is at the forefront right now.

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