A Goldilocks economy, like Goldilocks' porridge, is neither too hot nor too coldGoldilocks and the bear case for gold
The primary risk to the gold price is a return of the "Goldilocks" economy, according to analysts at a firm of asset managers.
By Richard Evans
Last Updated: 5:02PM BST 28 Apr 2009
A Goldilocks economy – one that is neither too hot nor too cold, sustaining moderate economic growth, low inflation and low interest rates – would "completely remove the safe-haven investment case for gold as a form of insurance against inflation or as an alternative currency", said the commodities and resources team at Investec Asset Management.
Real yields could once again be obtained in cash and bonds, and equities could begin discounting economic growth, the analysts added.
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"Under the Goldilocks scenario the US Federal Reserve's balance sheet will quickly adapt once economic activity begins to improve as the Fed reduces the money supply dramatically and curbs any major inflationary cycle," Investec said.
"Furthermore, under this scenario all other central banks will do the same. Inflation would be averted, and economic growth could continue."
The bank said the current high price of gold was driven by demand from investors putting their money into the classic safe-haven asset. But it added: "Should investment flows into gold cease or turn negative, we believe that this drying up of investor demand will have repercussions for the gold price.
"A return of risk appetite or improvements in other asset classes could result in an unwinding of investment buying and put considerable downward pressure on the gold price, particularly if global economic and financial conditions begin to show meaningful signs of improvement."
Although Investec has identified factors that could push the gold price down, the bank's overall stance on the precious metal remains bullish. It said: "We continue to believe that gold can perform well in either an inflationary or deflationary environment.
"This supports our positive outlook for the commodity and for gold equities. Quantitative easing programmes are also supportive for gold."
The London afternoon gold fix was $891.00 an ounce.
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