Gold price surges as inflation fears grow

A woman is reflected on a mirror inside a gold jewellery shop in the western Indian city of Ahmedabad.

A woman is reflected on a mirror inside a gold jewellery shop in the western Indian city of Ahmedabad.

Published Apr 26, 2011

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The gold price hit an all time high of $1 518 (R10 110) yesterday, after breaking through the $1 500 barrier early last week. The price of the precious metal is now more than twice the level it was in November 2008 ($712) when financial markets first scented danger from monetary policy.

Last week’s surge in the price of the precious metal came as an overdose of rescue remedies took its toll on investor sentiment.

Some of the patients – including Portugal and Greece – are still in need of emergency treatment and the medicine has now been applied so often it no longer works very well. And the financial markets are well aware of the danger this poses: high inflation but still weak growth in the advanced economies.

The possibility of a third round of quantitative easing – printing money – in the US prompted rating agency Standard and Poor’s to cut that country’s credit outlook from stable to negative last week. Investors took fright on concerns about the ultimate consequences of US monetary policy.

The two-and-a-half-year run up in the gold price started a few weeks after central banks announced synchronised rate cuts and a number of governments launched the first wave of money into their struggling markets.

The moves stabilised financial markets and tempered the recession that followed. The problem is that there has been no good moment to reverse the process. In many economies policy is still in panic mode.

The path of the gold price since the emergency packages were introduced reflect fears of inflationary fall out.

The gold price moved over $800 in December 2008, over $900 in February 2009, over $1 000 the following September, over $1 100 six months later, above $1 200 in August last year, $1 300 in September and $1 400 in February. Where’s the top?

It’s hard to say because there may be worse to come. Reuters commented last week: “Of the four AAA-rated countries that S&P has placed on negative outlook between 1989 and this March, three were downgraded within 15 months on average. That would put July 26, 2012, as the date to watch for whether the US loses the star credit status it has held since 1941. Such a move would likely make it much more expensive for the country to service its massive debt burden.”

Richard Wolff, a professor of economics at the University of Massachusetts, writing in the UK newspaper The Guardian, noted: “In the current fiscal year, with an outstanding US debt just under $15 trillion, the annual projected deficit is to be $1.5 trillion, which adds 10 percent to our debt.”

One way to lighten the burden would be to print still more money. No wonder the markets fear inflation. And there’s more to fear.

Love it or hate it, the US has been the engine of global growth since the end of the World War II and the heart of financial markets for decades. So troubles in that country are troubles for everyone.

There’s a positive spinoff for countries such as South Africa that export gold and other commodities, but the bonanza it produces for exports inevitably comes with a stronger currency.

The rand hit a best level of R6.66 yesterday putting manufacturing exporters at a competitive disadvantage.

And, with oil prices dangerously high – Brent blend crude was about $124 yesterday – there’s a danger in tinkering with the currency market to weaken the rand.

Petrol at the pump will soon be more than R10 a litre – without a weaker rand.

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