'Useless' gold has not yet list its luster
Editorial 2013-04-26 15:48
Gold necklaces at a jewelry store in Qingdao. (Photo/Xinhua)
The price of gold has plunged in the last two weeks and had lost 9.3% by last Monday to US$1,321 an ounce, before rebounding to about US$1,400.
The dramatic fluctuation has surprised market analysts, some of whom consider it the beginning of a bear market, while others say it is time to buy gold.
US investor Warren Buffet said in an interview in 1998 that he would not invest in gold because it cannot create anything of value, even though people pay high prices for it.
At the time, the price of gold was US$900 an ounce. But the expansionary monetary policy implemented by many states around the world, especially the two rounds of quantitative of easing by the US, drove the price of gold up to US$1,500 an ounce by June 2011.
Gold prices spiraled further upwards after September 2011 because of the European debt crisis and the controversy over the US debt ceiling. It averaged US$1,800 an ounce for all of 2011, and US$2,275 for 2012.
The bull market in gold began in the 1970s because of widespread inflation in developed countries, as a bear market in stocks and bonds led to investors retreating to the metal. Another bull market in 2009 arose due to the depreciation of the US dollar, triggered by a glut in the supply of US currency around the world. This pushed up the price of gold, which is denominated in US dollars.
The European debt crisis stoked the rise in gold prices, as investors dropped their euro-denominated assets for gold.
The central banks of newly emerging economies, which have lost trust in the US dollars and the euro, began to stock gold. Notable among them were Thailand, South Korea, China and India.
This year, as the European crisis drags on, China's economic growth slows and the US plans to phase out its quantitative easing policy, the stage seems set for a bear market.
But these factors do not explain the recent nosedive in the price of gold, and investor trust in its value in hedging against inflation, as well as the strong demand from Asian states for gold, will sustain its price in the long term. The "useless" metal will continue to be a valuable investment option.
