This note looks at the surge in the gold price since October. The key points are as follows:

Gold has been about the best performing investment this year. It’s been driven by a combination of collapsing interest rates, concern that monetisation will drive inflation, fear of the collapse of the global financial system and general investor caution.

A re-test of last year’s high of $US1032.7 an ounce looks very likely. In the short term, a period of volatility is likely in the gold price given that it has risen so far so fast and everyone seems to be jumping into it (which is negative from a contrarian perspective). However more upside is likely over the medium term.

Gold is also still trading well below its 1980 peak in real terms and remains cheap relative to shares.

While Australian data for wages and construction work released today was surprisingly strong its hard to see this being sustained. The rise in wages growth was partly driven by a pick-up in public sector wages growth and the slump in the labour market as highlighted by another sharp fall in skilled vacancies in February points to much weaker growth ahead. Similarly, its hard to see the strength in construction spending being sustained over the next six months given the fall in business confidence. More broadly the 45.7% slump in Japanese exports over the year to January provides another reminder of the hit coming down the line to Australian raw material export volumes over the next six months or so.

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