COMMENTARY | Gold prices rose again today, to $1,680 an ounce, according to Reuters. Prices in the first quarter increased 6.6 percent, a bigger jump than in most calendar years. Such a spike is unprecedented, given the improvement in the U.S. economy, which usually signals less of a demand for gold, a hedge against an improving market.
It hasn't taken long for critics to connect the boost to fears about Barack Obama. Already, an article on Vault.com contends the president could get re-elected due to Federal Reserve monetary policies, which are creating an overvalued market and a bubble. That would explain why people are buying gold despite the rosier economic picture.
The arguments that people are buying gold because they are scared of how Obama will wreck the economy go back to the 2008 election, where such speculation existed before the newly elected president was inaugurated. Fears range from default due to excessive government spending (as noted last year during the rating downgrade) or some socialist policy takeover.But in 2001 when Obama was just a state senator, planning a failed bid to unseat a U.S. congressman, gold was trading at $250 an ounce. During the presidency of George W. Bush, that price rose to $900 in January 2008, and that was before the "Great Recession of 2008." So the price surge predates Obama.
But the problem might well have something in common with concerns during Obama's years. The dramatic rise in government spending on Afghanistan, Iraq, excessive government education testing, a prescription drug bill that ballooned in price and a host of other big-government conservative initiatives, and even food stamp surges, took their toll on nervous investors. Fears about the Patriot Act and government abuses of power, coupled with disastrous responses to natural disasters convinced people that one couldn't trust the government, and perhaps its currency.But maybe the problem might have little to do with politics. In the New York Times article "Gold's Rise: It's Not Just Armageddon" in 2008, Morningstar analyst Vahid Fathi predicted the spike in gold to its current levels. But it had nothing to do with the winner of the 2008 election or the previous president. It has more to do with the lack of new discoveries (as opposed to those of the 1990s), tight-fisted bank policies on gold sales and a strong demand from emerging markets like China and India. Even a jeweler strike in India is having an effect.
There's a myth that gold is only good as a hedge against economic desperation. But Chairman Robert D. Arnott from Research Affiliates, an asset-management firm, revealed it is a more complicated picture. "Demand for gold plays a role in a strong economy, in a turbulent economy and also when there's inflation."
But though it is a good hedge, it's not a panacea for the end of the world scenarios. "I don't think planning on Armageddon is sensible," Arnott said. "And if we have Armageddon, who are you going to sell your gold stocks to?"
- Barack Obama