The Gold Double Standard

Ever wondered why, during the property booms in the US and the UK

, there was a dearth of voices warning of the potential for a bubble to build in property prices? When, in the UK, first-time buyers and buy-to-let investors were perfectly sanguine about borrowing huge sums of money to purchase real estate at over-inflated prices, it was largely viewed as a benign side-effect of prosperity brought on by precognitive and accommodative monetary policy. Why was this? We asked analysts at EurasiaTrade for their opinion and were somewhat surprised at the scope of the response. Where we half-expected a regurgitation of the usual No one saw the credit crunch coming that weve heard ad nauseam over the last three years, we were, instead, told that politicians were fully aware of the dangers but chose to ignore them based on their understanding of the collective behavior of herds. Eh??!!

A EurasiaTrade spokeswoman explained. Regardless of how far we, as a society, have come when compared to our counterparts in less developed parts of the world, the truth is that as long as our bellies are full and we perceive ourselves to be wealthy or at least financially comfortable, we dont really care what our governments do in our name or on our behalf. In this instance, it really was a case of people saying to themselves, We feel rich, we have nice cars, our property values are increasing by more than our annual salaries each year and life is sweet. Governments love this because the electorate is unlikely to vote for change when things are so good. Rising asset prices were a good thing!!

Fast forward to 2010 and those assets that spent the last decade in the stratosphere are now falling back to earth rather quickly despite efforts to keep them aloft. Still, there are some assets that are rising in value but, frankly, global governments would prefer you didnt know about them and, if you do, theyd prefer that you consider them so risky that youd avoid acquiring them. To what do we refer? Why, gold of course.

Last week, gold set a new record in US dollar terms when it reached $1283 per ounce. Good news for those holding gold but governments know full well that a rising gold price means that there is a lack of confidence in the value of paper currencies. One EurasiaTrade analyst said, Your $100 bill is just a piece of paper that at least for the moment bears a credible promise from the US Federal Reserve that it is, indeed, worth $100 but that promise isnt and hasnt been backed by anything other than the rhetoric from, amongst others, successive Federal Reserve Chairmen including the current incumbent, one Dr. Ben Bernanke since Nixon took America off the gold standard so he could print money to fight the Vietnam War.

Above all, investors need to realize that there is a clear double standard at work here. Governments want high prices in assets THEY can control. With real estate, they can manipulate interest rates or sales taxes; the banks can be accommodative with their lending criteria so as to encourage people to borrow more and send property values higher. This makes people feel richer and less likely to crave change.

Gold, however, cannot be printed and although many suspect otherwise, the market for it is not so easy to manipulate. If they cannot control the price given what gold represents, then they must endeavor to make its price action so volatile as to dissuade all but the most committed investors from buying it. The thing is, with more and more investors buying gold, it is becoming more and more difficult to knock the price back down. That is not to say there wont be corrections from time to time but the momentum in the price rises has just become that little bit stronger. EurasiaTrade advises that there is still plenty of upside potential in the gold price and, therefore, it will remain firmly held in their portfolio.

by: Martin Runde

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