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No commodity seems to directly respond to changes in economic outlook like gold (NYSE:GLD). I caught up with Greg Ip – The Economist U.S. Economics Editor and author of The Little Book of Economics — to find out why people invest in gold …
Damien: Gold has had quite a run and a lot of people are heavily investing in gold…[it] seems to do really well when fear is really high. Do you think that gold is now sort of a dangerous investment class?
Greg: I think gold is always a dangerous investment class just because it is very, very hard for you and the smartest people to fully explain why it goes up or down. It’s not like other assets, it doesn’t pay you a yield or an income and therefore you can’t really evaluate how important gold is relative to some stream of income. It’s not like that with say a stock or bond or a piece of commercial real estate. As you say, it responds a lot to fear and fear is a very difficult thing to predict or to measure. I mean, how are you supposed [to] evaluate the impact of the Soviet Union invading Afghanistan, which is the last time we had a massive spike in the price of gold?
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One point I would like to make is that gold (NYSE:GLD), like oil (NYSE:USO), trades in a global market and so when you see the price of gold being extremely high it may not necessarily be reflecting fears of inflation in the United States, it may be reflecting fears of inflation in other countries like China (NYSE:FXI), and those countries do indeed have a severe inflation problem.
Greg Ip is The Economist U.S. Economics Editor and author of The Little Book of Economics.
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