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Once upon a time, if there was a significant (sometimes not so significant) "issue" that had a wide regional or global impact (e.g. the soviet invasion of Afghanistan in 1979) then the financial world rushed off to risk assets. Chief amongst these risk assets was gold, the financial safe haven.

In 1980 gold hit a record US$800 an ounce. There were economic problems and the Soviets had invaded Afghanistan. There were concerns they wouldn't stop there but might have designs on Pakistan, the ultimate objective being a warm water port for the navy. The Iranians were also holding hostages taken from the overrun US Embassy in Tehran. The financial markets became risk averse and currencies fell as gold was king, it was considered the safe haven of all safe havens.

Fast forward to 2011. Gold is now seen as just another risk asset, along with other commodities and commodity dependent currencies (such as the Australian and Canadian dollars). On 'risk off' days the gold price will fall and money flows into the "new" safe haven, the US dollar. I say "new" in inverted commas because the USD has been the worlds reserve currency for over 80 years, since the world abandoned the gold standard.

When there is an appetite for risk, or the world suddenly looks rosier to the markets, gold tends to rise and the USD falls.

We are in a particularly volatile period at the moment. The situation in the Middle East is as unstable as it has been in my memory. Love them or hate them (I was a 'hater', I must admit), despots are good for stability. Since the camp David accords in the late 1970s the idea of war between Israel and Egypt has been off the table (I don't suggest it is back on the table, just that Egypt is a less certain entity in that regard right now).

Similarly, the perennial pariah, Iran, is in the news again...for all the wrong reasons. There are all the makings of a full blown military conflict building. Europe and the United States are imposing sanctions to try to force Iran to abandon the idea of building nuclear weapons and Iran is threatening to close the Strait of Hormuz.

In 1980 such a state of affairs would have seen the price of gold going stratospheric. Instead, when the situation looks risky the price of gold falls and money rushes into US Treasuries, paying little or no interest (sometimes the yield is even negative).

It is true that gold has been booming for the last few years and that, in itself, has a limiting effect on further rises. However, I contend that there is a new paradigm when it comes to global financial markets. All commodities are seen as riskier than the USD and, in dangerous or uncertain times, fall in price as the value of the USD rises.

It is counter intuitive. There are so many US Treasuries floating around (over $15 TRILLIONS worth) that you could drown in them! Still, the reality is there for all to see (well, not all, some still don't believe the reality and prefer to believe the opposite).

Today , for example, is looking to be a risk off day. Gold is down, the AUD is down and the stock market is down. I haven't looked but I am sure the yield on US Treasuries is also down as the price of them rises, as demand for them increases.

Tonight the Europeans may proclaim a solution to the EURO (no sarcasm implied...oh, all right, just a little!), If they did then commodities would surge, the USD would fall and stock markets would rise. If, however, they proclaim that Greece cannot be saved then the financial markets will become very risk averse and commodities (including gold, now just another commodity) would be on the outer.

So, in the space of 30 years (really less than that) we have a completely new paradigm and a new haven in uncertain times, the almighty USD.

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Peter
Hawthorn - AFL Premiers 1961, 1971, 1976, 1978, 1983, 1986, 1988, 1989, 1991, 2008.

Keep on posting, we need everyone's point of view.

Ignore defamation, it is just unchecked and ill-considered enthusiasm.

I think you may have something there. While people still care about gold, a lot of governments don't.

For example in 1997, during the Howard (conservative) government, the Reserve Bank of Australia sold 167 tonnes of gold and reduced the nation’s gold reserves to fewer than 80 tonnes. The reasoning behind reducing the gold reserve is that gold represented a poor investment and Australia had successfully integrated itself into global financial markets. Australia should not worry about access to those markets during a financial crisis. As international trade used different paper currencies (often US$) there was less and less need for Australia to actually use the gold.

Reinforcing this view is that over the past two or three decades, the world has experienced any number of economic ‘crises’, but gold played no part in coping with them.

It isn't as if we could go back to the gold standard anyway as the world's economy has grown so much larger that I doubt there would be enough gold in the world to back it unless gold was made much, much more expensive. So fiat currencies is the only option left.

It would be nice for the world if the euro was to solve its problems and help stabilise the world economy but it doesn't look like that will happen. So I suspect that the US$ will remain the world defacto currency for the short to medium term. The only other possible world currency would be the Renminbi but their government seems very resistant about releasing their controls on it.

The other rationale the Reserve Bank used for selling down the official gold reserves was that Australia still had at least as much gold in the ground as had ever been mined in our history. In reality, it is probably considerably more and the high prices have made even low grade deposits economic.

Gold will never again be used as a medium of exchange, except on an occasional ad-hoc basis (perhaps). As I said elsewhere, the world has moved on from the gold standard and will never go back to it.

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Peter
Hawthorn - AFL Premiers 1961, 1971, 1976, 1978, 1983, 1986, 1988, 1989, 1991, 2008.

The EURO is, unfortunately, a basket case. It was poorly conceived in the first place. There is no competitive advantage for countries like Spain to produce goods and services for sale to Germany, when both use the same currency. If they had different currencies then the Deutschmark would be much stronger than the Peseta and Spain would have a competitive advantage.

The Renminbi is far too regulated to be a reserve currency. Even the limited trading proposed is niche and of no real consequence to the global economy.

China simply cannot afford to allow the currency to appreciate to the level it probably should be today. Such a move would remove a significant competitive advantage for China's manufacturing industry, making manufacturing more attractive elsewhere (especially the USA). That, in turn, would cause economic hardship and social dislocation, possibly even revolution. Ironically, that would result in the Renminbi falling in value!

Despite all predictions (wishes and desires of some) to the contrary, the US Dollar will remain the global reserve currency for a long time to come. The new economic paradigm means that, in times of uncertainty when risk appetite is low, money will flood into US Treasuries (paying very little yield). When risk appetite is high(er), the USD is sold down and commodities (including gold) and riskier currencies (like the AUD, with a good interest rate) become more attractive.

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Peter
Hawthorn - AFL Premiers 1961, 1971, 1976, 1978, 1983, 1986, 1988, 1989, 1991, 2008.