Tarnished Gold and Sliding Oil Bring Ray of Hope; ECONOMIC ANALYSIS

Article excerpt

Byline: Russell Lynch

RISING unemployment, stubborn inflation and another slap for the Chancellor from the IMF don't, on the face of it, add up to a good news week for the British economy. But there are reasons to be cheerful: the biggest plunge in the gold price for 30 years, and oil sinking through the $100-a-barrel mark for the first time since last July.

A grim week for the gold bugs could mean good news for the rest of us. The metal is now down almost a third from its peak in September 2011, hit in the aftermath of a summer rocked by Euroturbulence when frantic investors simply sought to preserve wealth.

Gold may be a handy panic room but it generates no income, and the only way it works for you is through increasing value. It's not a great sign when investors want to back a scarce but useless metal that just sits there, rather than putting it to work generating returns that can be invested elsewhere.

So we should rejoice at the fall in the metal's price. Even if hopes that the eurozone crisis is entering a milder phase look slightly exaggerated, the shift out of gold surely heralds a change in sentiment.

Sometimes it pays to take a longerterm perspective. The graph shows the US Dow Jones Industrial Average divided by the gold price over the past 80 years or so. It is an indicator of how willing investors are to buy shares in the biggest companies in the world's largest economy, compared with lumps of useless shiny metal. When the ratio is high -- boom time -- shares are dear and gold is cheap. In a bust, the reverse is true and the ratio falls.

The recent tumble in the gold price is pushing the measure up again from its recent trough. It looks like an indicator of improved risk appetite in the international investment community. …