High Gold Prices Warn of Harder Times
NEW YORK (
) -- Four-digit
are a warning for investors that the threat of a
recession
is still on the table.
The correlation of gold prices to a recession is fragile, but currencies can be a leading indicator. Typically during a recession, the U.S. dollar will lose value as the
Federal Reserve
keeps interest rates low to jump-start a constricting economy.
Omer Esiner, senior currency market analyst at Travelex
, says "the greenback would likely sell off as the economy slows and as the Federal Reserve cuts interest rates in order to spur economic activity. Similarly, the currency would likely bottom ahead of the economy and actually lead a recovery in anticipation of tighter lending rates."
Low interest rates put more money into circulation, which devalues the dollar and makes dollar-based commodities like gold more appealing to investors. Not only will gold become cheaper to buy in other non-U.S. currencies, but it becomes attractive as a hard asset, a form of money that never loses value.
Out of the four recessionary periods since the U.S. abolished the gold standard, three of them have resulted in higher gold prices.
During 1990-91, an eight-month recession triggered by the savings and loan crisis, the gold price rose 0.28%. In the next recession of 2001, after the Internet bubble burst, gold rose 5%. From January 2008 until the third quarter of 2009, when GDP started to grow, gold prices popped 29%. During the recession between 1980 and 1982, gold actually plummeted 63%, but after reaching an all-time high at the outset of $850 an ounce.
The recession of 2008, however, was different. This recession shook every country, market and currency in the world. Panicked investors bought U.S. dollar securities as a safety measure, believing the dollar would be the one currency left standing.
Esiner believes that the
bottomed Nov. 26, 2009, when the dollar index hit $74.17. Despite a stronger currency, gold prices still reached an all-time high of $1,227 an ounce in December 2009, but prices were unable to sustain or since recapture this level.
Many analysts say gold will remain range bound between $1,130 and $1,175 an ounce. This lack of selling indicates that the crisis premium is still in the markets, meaning that people are still scared and holding onto their gold.
triggered by Standard & Poor's credit downgrades of Greece, Portugal and Spain helped push prices over the $1,160 resistance level. But better-than-expected earnings from U.S. companies were helping risk appetite and preventing prices from breaking through their all-time high.
While gold struggles to retake $1,227 an ounce, prices have made new lifetime highs in the euro, yen and Swiss franc, which means a recession could still be a reality for these countries.
Esiner believes these currencies will fall even further. Severe European sovereign debt problems will continue to hurt the euro and the Swiss franc, which trades in tandem. Japan, on the other hand, is so paranoid about entering another deflation that Esiner believes policy-makers will continue to devalue the yen in relation to the U.S. dollar.
Higher gold prices and a weaker local currency highlights a low interest rate recessionary environment. For now, it appears that the U.S. is out of the woods while other countries are in the hot seat. But with some analysts estimating that gold's real price, without speculation, is $800 an ounce, 4-digit gold might warn of harder times to come.
>>More stories on gold investing
--
Written by Alix Steel in New York
.
Alix joined TheStreet.com TV in February 2007. Previously, she held positions in film and theater production, management, and legal administration. Alix has a degree in communications and theater from Northwestern University.









