Gold and other metals

Recent downward in gold prices

It has been about a year since Warren Buffett made a comparison between investing in gold vs putting money in business. Refer to his Letter to Shareholders published in early 2012. The gold price started to decline almost a year after his public comments on gold.

Gold is a traditional hedge against inflation. Thanks to the inflation control strategies and techniques by the central banks, inflation risk going forward is no longer significant. In the depression of 1930s, the ensuing deflation was almost 50% in the U. S. with little intervention from the central bank. In the financial and economic crisis since 2007, all the central banks and governments did were to counteract the big deflation rather than create inflation or even inflation expectation.

A second reason for dropping gold price is that the euro would survive despite a lot of speculations last year that the euro would crash. Euro zone nations are seen very determined to move forward with a bank union and a single supervision of their financial systems. Structure changes in some Euro countries are making good progress.

Currency war is not likely. It is quite reasonable for Japan to run easy monetary policy, and push the world third largest economy out of the stagnation since 1990s. A revived Japanese economy benefits the world in general. This is evidenced in the recent G20 meeting in Russia with no specific complain about Japan’s easy monetary policy by other nations. Instead a lot of people focused on the positive impact on the economy of a weak Yen.

There are a lot money invested in gold, and a great twist is in process moving money out of gold and toward equity, housing and bond market.

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