Gold's False Signals


Gold's False Signals

The metal hits a 25-year high. But don't be unnerved by the implications.

Conventional wisdom holds that when the price of gold rallies, inflation is accelerating and interest rates are about to soar. Some pundits also call gold's recent run-up to $550 an ounce a sign that the dollar's world value is ready to plunge. They suggest gold will go hundreds of dollars higher.

But there's little evidence to support such sentiments. The dollar is as strong against the euro now as two years ago, when gold was $400. Nor are Treasury-bond rates spiking.

Metals analysts have a more down-to-earth explanation: Gold is a commodity, subject to brisk demand and lagging supply. Demand, largely from Asia, is fervent, and mine production and recycling are flat or down. There's more exploration, but new reserves could take four years to develop.

Gold could reach $600 this year, but probably not for long. Australian financial firm Macquarie Research predicts $600 by this spring but $400 in the long run. JPMorgan expects $600 by 2007 but $500 as a long-term level. Like oil, gold won't soon return to its low prices of five years ago. Just don't interpret this as dire for the economy or your foreign travel plans.

-- Jeffrey R. Kosnett