Gold is universally seen as a safe haven protecting investors principally from rising inflation but also other market risks such as the debasing of currencies by central banks or falling financial asset prices. It thus acts as a form of insurance. Given the highly expansionary monetary policy followed by the Fed since the bursting of the housing bubble and financial collapse in 2008, it is not surprising that Gold has outperformed most other assets despite a generally deflationary environment. And while opening the monetary spigots around the world has done little to raise the general price level (i.e., inflation) since excess global capacity for goods and services continues to be historically high, it has raised the relative price of Gold to levels that suggest an excessive insurance premium. (See our previous features – Shifting Tectonic Plates and Gauging Secular Trends).
Zero interest rate policies by central banks around the world have distorted all asset prices and made it increasingly difficult to gauge risk. Gold prices may thus be unsustainable at current levels.
*The title is by Skye Gropper, formerly of Institutional Investor.
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