In spite of recent rises in the price of gold, it may still be undervalued, says the FT on Tuesday, “but it is in the interest of business and consumers that its most bullish fans are proved wrong.”
Political instability and reducing demand for equities both make gold attractive. But the more pressing argument from bulls is the fall of the dollar and the Fed’s continuing cuts to interest rates.
We should think of gold as the new global currency, says the FT. When the dollar falls, gold rises. And as gold has a finite supply, it should rise against the Euro and Sterling too.
The Fed’s continuing interest rate cuts risk a precipitous fall in the dollar, increasing demand for gold as a hedge. At the same time, lower interest rates mean lower returns on equities, making the low yield on gold seem more competitive.
It seems a compelling case to go long. But the FT warns central banks that rising gold reveals nervousness among investors, and that “the Fed must show it is not prepared to allow inflation to take off.”