As the elusive Edward Pastorini vanishes as quickly as he became a star in Wednesday’s fantastical bid for Gold Fields, one item in the alleged US financier’s pitch for taking over the iconic gold miner could provide a strand of reality amid the mirage.
“The LBO firms, corporate raiders and I feel gold is going to rise to over $1,000 an ounce over the next two to three years,” Mr Pastorini apparently opined in an email to Bloomberg.
Gold reached its peak of $850 an ounce back in 1980 before falling back. But the metal has rallied strongly during the present commodities boom, helped by the impression that it is a useful hedge against the falling dollar, hitting a 26-year high of $730 an ounce last year.
Now there are myriad predictions that it will spike above its dollar high of $850 this year, with other excitable types predicting that that benchmark may just be the first to fall: $2,000 an ounce by 2010, $1,000 an ounce within five to seven years, gold above $5,000, take your pick for where prices could get to in another Great Gold Rally.
But despite arousing fervent passions among its fans, - who claim that the yellow stuff is the only real store of value and comes into its own when other assets turn sour - has the metal served its purported role as a hedge against market meltdown elsewhere?
The Economist this week asks the question, rolling out a paper from the end of last year by Dirk Baur and Brian Lacey at Trinity College Dublin. That looked at the role of gold both during normal market conditions and during extreme events when market participants turn to gold for a safe haven investment.
They found that gold does act as both a hedge for equities, in that returns tend to be positive when equities returns are negative and vice versa, and a safe haven, in the sense that it tends to rise when stock markets fall sharply.
But this safe haven effect holds for only up to 15 trading days. As the stock market recovers, gold returns turn negative - meaning those who seek comfort in the arms of the metal in the aftermath of a bruising equities run will find underperformance as their reward.
As for bonds, the academics found that gold has acted neither as a hedge or a safe haven, generally displaying a positive correlation.
The Economist’s conclusion is that, rather than providing a safety net against a prolonged bear market, gold is primarily a momentum bet on the commodity bull run, or a currency bet, with gold having performed far better against the dollar and yen than against the euro.
But that, we assume, is fine by Mr Pastorini.
