GOLD PRICE NEWS - The gold price was a lone bright spot today in what was an ugly session on Wall Street. Amid broad-based liquidation in stocks and commodities, the gold price finished higher by $1.31 at $1,239.67 per ounce. The price of gold hit an intra-day low of $1,227 per ounce before rallying Tuesday afternoon. Investors flocked to gold as a store of value and shed investments levered to the economy and to global growth.
Strength in the gold price came amid escalating concerns that the sovereign debt crisis in Europe is worsening, along with worse than expected economic data out of China. The Dow Jones Industrial Average (DJIA) plummeted 268.22, or 2.7% to 9,870.30. At this level, the Dow Jones is now lower by 5.3% for the year - compared to the 13.2% rise in the price of gold. Market volatility soared on Tuesday, as the CBOE Volatility Index (VIX) climbed 18.9% to 34.48. Gold price volatility, as measured by the CBOE Gold Volatility Index, rose by 5.5% to 24.07 and sits in the middle of is 2010 trading range.
As financial markets have declined due to heightened risk aversion, there has been growing speculation that central banks are considering renewed quantitative easing measures to prevent the likelihood of a double dip recession. Amid such debate, the gold price has broken out to a new all-time high in recent weeks. While monetary and fiscal stimulus may have temporarily stabilized the economy in 2009, the eventual consequences of unprecedented amounts of fiat money creation are an unknown. A symptom of looming challenges is the rising gold price, which demonstrates a lack of confidence in the current international monetary order.
A recent report in The Economist, titled “Repent at Leisure” by Philip Coggan, discussed the consequences of the mounting debt levels facing many of the world’s largest nations. Coggan highlighted the irony of the economic problems facing the United States and Europe. Over the past few decades, debt has been the answer to all monetary troubles, however, it is now debt itself that has become the source of the problem. During the 1980s and 1990s growth was steady, unemployment and inflation were relatively low, but there was a substantial rise in debt levels. A survey conducted by the McKinsey Global Institute found that average total debt in 10 mature economies increased from 200% of GDP in 1995 to 300% in 2008.
Since unemployment and inflation remained low, western banks deemed it unnecessary to raise rates to prevent consumer booms. Unfortunately these measures led to a culture of deficit spending in which the prevailing thought was any problem could be solved by more borrowing. An unintended consequence of such low rates was the rising gold price, which tends to perform particularly well during periods of negative real interest rates. Central bankers slashed rates near zero in an effort to prevent a suffocating debt deflation, sending short rates below the inflation rate. The gold price rose as the opportunity cost of holding a sterile asset such as gold declined and as investors looked for ways to protect the purchasing power of their savings.
Coggan went on to say chastise government leaders for borrowing from the future and using debt as a means to provide an unsustainably high standard of living. Now, governments are between a rock and a hard place, dealing with the debt and a challenging economic backdrop while at the same time trying to decide the appropriate time to implement austerity programs. The idea that all economic problems can be dealt with through borrowing must change, Coggan concluded, as “a society built on consumption will have to pay more attention to saving. The idea that using borrowed money to buy assets is the smart road to riches might lose currency.”
Based on the recent actions of policymakers in the U.S. and Europe, however, it does not appear that governments are willing to make the difficult but necessary choices to reign in the problems of escalating debt levels. As political actors, the easy path that appeals to the populace, i.e. something for nothing, is the most likely path going forward. However, the bill will eventually come due and at such time the gold price will likely be at much higher levels.
