GOLDBUG: a store of value

http://economist.com/node/16536800

Gold
Store of value
Low returns on other investments and fears about the world economy have caused the price of gold to soar. Don’t count on its continued rise
Jul 8th 2010 | Delhi and london

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The appetite for gold arises partly from the paltry, uncertain returns from more conventional investments. Gold’s main drawback is that it pays neither a dividend, like a share, nor a coupon, like a bond, nor a rent, like property. But monetary policy has been keeping official interest rates, and thus the opportunity cost of holding gold, low and seems set to do so for a while. The yields on the government bonds investors regard as safest, notably America’s and Germany’s, are also thin. Equity markets are weighed down by worries about economic growth. Investing in property, which lay at the root of the financial crisis, requires a boldness that many still lack.

At the same time, the looseness of monetary policy has made many investors fear the eventual resurgence of inflation. The wretched state of many governments’ finances makes some worry about states’ ability to repay their debts—or about the temptation to inflate them away. Banks’ exposure to sovereign debt and to a still-fragile world economy adds another layer of concerns. And when all governments would like their currencies to be weaker rather than stronger, whose paper money do you trust? Hussein Allidina, head of commodities research at Morgan Stanley, reckons: “Gold looks better every day with growing sovereign risks.”

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Over the past few years, the market’s net return has been zero or maybe negative depending upon the interval, so gold and siler look good.

Cheap insurance.

If inflation spikes, it’ll really pay off.

Depending upon what loon you listen to predicting the price of gold, it could be essential.

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