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When gold’s war premium goes, can it win the peace?

When gold’s war premium goes, can it win the peace?

Middle East offers a boost for now; Gold to profit until central banks raise rates.

March 3, 2011 3:14 by



Real interest rates in the G7 economies are now all negative except in Japan, compared with five nations this time last year as inflation has picked up.

In the rest of the G20, which includes Brazil, China, India and Russia, real interest rates are negative in 6 of the 13 nations, compared with 5 this time last year.

So the heat is on the central banks not to lag in the fight against inflation, particularly in the emerging world, home to the top biggest gold buyers — India and China, which has already raise rates three times since October 2010.

“There is lots of capital in China, they’ve got the same fears that any other investor would have and with inflation picking up, by holding renminbis you get negative real returns,” said Deutsche Bank analyst Daniel Brebner.

“That doesn’t make much sense and you have to look to hedge against that risk,” he said, adding: “This is something we’ve been seeing and it will continue.”

GOLDILOCKS AND THE G3 BEARS

Meanwhile, the gold/oil ratio — the number of barrels of oil needed to buy one ounce of gold — has fallen to its lowest since late 2008, the nadir of the global financial crisis, indicating oil’s outperformance relative to that of gold.

But the effect of the Middle East turmoil on both assets has made this particular market gauge less representative of investor risk appetite or confidence in global growth.

“Both are inflation indicators but they can also be safe-havens sometimes, so there is some credibility behind this ratio, but don’t read too much into it,” said Commerzbank analyst Eugen Weinberg. “On the consumption side, those two commodities are not competing with each other.”

Market-based inflation expectations have also picked up sharply from where they were six months ago.

The Federal Reserve and the European Central Bank are widely expected to withdraw emergency cash measures put in place during the financial crisis, while many emerging economies like China are tightening policy to combat inflation and “hot-money” inflows from yield-starved investors.

For now, even if gold loses its “peace dividend” from tensions subsiding in the volatile Middle East, it is still a long way off buckling under the weight of the central banks collectively allowing for higher inflation and stronger growth.

After all, aside from gold, no other major asset class has rallied for 10 years in a row, defying global boom and bust, inflation, deflation, oversupply or shrinking consumer demand.

(By Amanda Cooper. Editing by Veronica Brown and William Hardy)



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