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Gold is at an all-time high, but not for any rational reason
September2011
Gold is at an all-time high, but not for any rational reason
By Raman Jokhakar, Mukesh Trivedi, Hon. Jt. Secretaries
Reading Time 2 mins
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What do you say to an asset that has few commercial or practical uses, earns no rents, produces nothing, employs nobody and yields no dividends — but manages to rise nearly 40% in one year? On top of that, this asset has been on a tear away run, its longest surge in the last 31 years, and shows no signs of slowing down. At around INRNaN per ounce, gold is on a roll, though many savvy investors will be stumped if you asked them to explain exactly why. Some might say, after scratching their heads, that gold is a defensive position — the thing to hold when everything around you is turning into dust. Thus, the trendy explanation of gold’s meteoric rise is that it’s a mirror image of what’s happening in developed markets — as the European and US economy looks increasingly shaky, money is fleeing conventional assets and turning, literally, into gold. Which investor, even a sophisticated one, would bet on European currencies now?
Who’d stick their necks out on bonds issued by treasuries that increasingly look like they might go under? When sovereign status begins to sound hollow, people head for the yellow stuff. But why do people buy gold and not tin? Well, some folk are diversifying into silver, palladium and platinum, all of which have become dearer. But why is gold the benchmark of value across cultures and centuries? The Egyptians buried their pharaohs with it, the conquistadors went mad looking for El Dorado in the Amazon forests and Indians have always squirrelled the stuff away in lockers and the bowels of temples. Ultimately, the answer to why we value gold might not lie in rationality, but in its exact opposite: faith. Gold has value simply because so many people collectively share the belief that it does. Without that belief, gold would be about as valuable as, say, tin.
