Gold Prices in This Recession

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"At the dawn of the Obama administration, hardship runs deep and gold prices run high. . ."

In a sign of the times, NBC sold one of its last three Super Bowl commercials to a late-night cable advertiser, Cash4Gold. It featured Ed McMahon and MC Hammer. The Florida company offers to pay cash within two weeks for your gold, based on its weight and purity - as measured by the company. In the commercial, Ed and MC send in their valuables, to show you how it works. A 30-second spot cost $3 million, up 11% from last year. Cash4Gold says it can pay the freight because business is booming.

This dubious pitch for an alternative to the local pawn-shop (or the kiosks at the mall, where now you can also sell your gold and other jewelry) points up two salient currents. At the dawn of the Obama administration, hardship runs deep and gold prices run high - $919.50 an ounce Friday, January 30.

A recent post pointed out that gold prices normally tend to go down in recessions, as inflationary fears subside. But in some recessions - including this one - other factors also come into play. As stocks continue to flounder and governments around the world struggle to combat the global recession, fear and uncertainty have made gold attractive as the last safe haven. Putting it in traditional terms, as government pump-priming rekindles fears of inflation around the world, gold offers a hedge against the prospect of depreciating paper currencies.

What is surprising in this go-round is that gold and the dollar are moving in tandem. Both are up. Normally, a strong dollar implies a fall in the dollar-price of gold. But not this time. Instead, the London p.m. fix price of gold (the bellwether indicator) has risen in the last month.

Pessimism as to the nation's credit-worthiness has probably fueled the rise in the dollar price of gold in recent weeks. This doesn't necessarily mean that now is a good time to buy gold, in anticipation of higher gold prices down the road. In our view, the purpose of buying gold is to have money, not to make money. To that extent and for that purpose, you may wish to add gold to your portfolio.

True, market sentiment seems to expect a surge in gold prices as the current economic environment deteriorates still further. But there are also risks in the gold play. For one thing, the markets for gold and its related securities (mutual funds, mining stocks, and so on) tend to be thin. There may be few buyers and sellers at any given time and big players can cause substantial price movements. This goes double for governments.

A recent rumor had it that Chancellor Angela Merkel was expected to sell German gold holdings as a means to offset part of the cost of the German government’s widening budget deficit. So far, this hasn't happened. But it could. Back in the 1990s, for example, then Chancellor of the Exchequer Gordon Brown sold substantial amounts of Britain's gold bullion - at what by today's standards were fire-sale prices of about $250 an ounce.

Governments and international institutions hold something like three-fourths of the world’s gold bullion, mainly for monetary purposes. Gold prices as expressed in pounds (662 pounds per ounce Monday, January 26) or Euros (716 per ounce Friday, January 30) are now at all-time highs. Should stressed governments respond to such record levels by selling some of their holdings, prices could fall in a hurry.

So stay tuned. This could be an interesting year for gold prices.

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