Gold - Haring away

Feb 26th 2009
From The Economist print edition
Burnished by bad news, gold looks like a good each-way bet
http://www.economist.com/finance/displaystory.cfm?story_id=13185396

IT IS 1979 and Harry “Rabbit” Angstrom, the hero of John Updike’s series of novels, is explaining to his wife why he has just spent more than $11,000 on 30 gold krugerrands. “The beauty of gold is, it loves bad news,” he says. Three decades later, gold is once again thriving on despair. Before Christmas, a troy ounce could be bought for around $800. By the third week in February, gold was trading at close to $1,000 an ounce.

A surge in demand for gold as an investment lies behind the jump in prices. Flows into exchange-traded funds, which buy and store gold for their shareholders, rose from 105 tonnes in January to 208 tonnes in the first three weeks of February, according to Suki Cooper at Barclays Capital. At that rate, inflows will soon surpass the total of 322 tonnes for the whole of 2008. Buying by investors has more than made up for a slump in gold-jewellery purchases in key markets, such as India and Turkey, where higher prices and wilting exchange rates have crushed demand.

How high might the gold price go? Gold bugs talk excitedly about it reaching $2,300, which would match the January 1980 peak in real terms (see chart). Already the gold price is above its average since 1972 when calculated in today’s money. There is a limited supply of gold and lots of potential buyers—ideal conditions for a bubble, says Stephen Jen at Morgan Stanley. If gold is burnished by grim news, it seems likely to become still more alluring.