COMMENTARY — Gold is not just a commodity

For the first time this century, investors are openly challenging the monetary value of gold. Many have proclaimed that gold is just another commodity, void of any real currency value, and therefore is ineffective as an inflation hedge.

In addition, the advent of the Gulf War tensions and European currency turmoil have had little positive effect on gold prices, leaving many investors disillusioned about gold’s historical role as a safe harbor in times of political and financial crises.

But perhaps the actions that have most severely crippled the resolve of gold investors worldwide have been those of the central bankers, who have sold large amounts of gold during the past 18 to 24 months. Central bank and other “government-type” selling has replaced Russian selling as the single largest threat to gold prices. The once “untouchable status” of this large gold reserve seems to have come into question . . .

If gold has truly lost its lustre and become a mere commodity like base metals or oil, there is indeed no reason for it to trade at US$330 per oz. The “above-ground” inventory held by central banks and “quasi-government” institutions is sufficient to supply the current jewelry and fabrication demand for at least 15 years. Gold as a pure commodity, devoid of all of its traditional values, is worth significantly less than US$300 per oz. Yet gold is not just a commodity. In the history of mankind, it has always represented a store of real value. Gold will retain many of its traditional roles; however, we must also recognize that our world today is remarkably different from what was just 20 years ago. The unprecedented growth of financial instruments, which have evolved from the deregulation of financial and commercial markets, has spawned many competitors for gold as an inflation and currency hedge. Given certain financial environments, these competing instruments will appear more attractive than bullion. Gold, as it has done in the past, will find its niche.

In the meantime, the overall environment for bullion is not positive. In addition to central bank selling, producer selling continues to be a problem. Low inflation, a stronger U.S. dollar, high yields and the lack of consistent worldwide financial stimulation will keep 1993 prices generally below those of 1992.

— From a recent Gold Price Outlook by Egizio Bianchini of Nesbitt Thomson.