iTODAY: All that glitters is not gold

Article from ITODAY

All that glitters is not gold

Probably the only real surprise about the surge in gold prices is that it took so long to arrive.

Last week, gold touched an all-time high of US$1,227.50 ($1,705). In September it was still less than US$1,000. The price has dropped below US$1,200. It isn't hard to figure out why investors are interested in gold again. Central banks are pumping fresh money into the system. Economic history says that eventually this will lead to inflation. In reality, gold has a mixed record. A few industrial uses and jewellery aside, gold is valuable only insofar as other investors think it is valuable.

There isn't much chance of central banks making their currencies convertible into gold again. It may secure itself a greater role as a reserve asset.

Gold may have a role in protecting against inflation, but there are alternatives.

Real-estate rebound

The price of real estate will not always move in line with inflation. And you might want to steer clear of the markets where there has yet to be a retreat from the exuberant prices of 2006 and 2007. Even so, if there is more money chasing a static amount of land and buildings, prices will rise.

Crude oil

Oil has stopped being just stuff that we put in our cars, and become an investment in itself, effectively making it an alternative to gold.

Stock picking

Moderate, persistent inflation in the 3-per-cent range is good for big, blue-chip companies. They can edge up prices along with everyone else, and usually get away with increasing wages just a bit less than inflation, cutting labour costs. In those circumstances, shareholders should do fine - and their equities will more than keep up with rising prices.

Luxury goods

Once inflation takes off, only real assets that will hold their value - everything else is just paper. They should start to soar in price as the mega-rich realise they are among the few ways to protect wealth.

Private-equity funds

A leveraged buyout firm buys well-established companies in basic industries then loads them up with debt, while hanging on to a bit of equity. Inflation will effectively wipe out all that debt. The result? The equity that is left over will be worth far more.

None of these will necessarily work in the long term. The only real way to control inflation is to raise interest rates high enough to create a deep recession, and choke off rising prices. That's what central bankers did in the late '70s and early '80s, and may do again sometime around 2015 or 2020. Once that happens, you might not want to be in property or equities.

That, is some way off. As we move into the early stages of an inflationary era, those five assets should do at least as well as gold, if not better.

Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.

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