Posted on 12/01/2005 10:40:52 AM PST by .cnI redruM
NOTHING swells the breast so much as the thought that you have been proved right at last. After riding high at the start of the 1980s, gold bugs had a miserable couple of decades. The price declined relentlessly, mocking their credo that the security of the financial system ultimately depends upon the yellow metal. Lately, though, the faithful have enjoyed their reward. In the past five years the price of gold has doubled. This week in Asian trading it briefly surpassed $500 a troy ounce—a level last breached in 1987. You can almost feel the bugs' excitement as the message sinks in: gold is back.
This being gold, the resurgence has brought forth all manner of alarming prophecies. The price is an omen of rampant inflation; bonds are doomed; the dollar is about to fall prey to the United States' reckless deficits; the euro will shortly be revealed as a worthless creation of bureaucrats.
The world is an unpredictable place. But, with the possible exception of a fall in the dollar, not much of the above catalogue of doom looks likely; and none of it has much to do with gold's good run. The dull truth is much less bullish for gold. Investors have put money into a wide range of metals, and precious metals' prices, including gold's, have risen with the base. Meanwhile, gold remains fundamentally unattractive. It yields nothing and central banks are sitting on vaultfuls of the stuff that they want eventually to sell. Gold bugs hope that $500 is the threshold at which mainstream investors will start once again to take an interest in the metal. Caveat emptor.
Advertisement The fascination of gold lies in its being not only a commodity but also a store of value and means of exchange. The glamour and the mystique lie in the latter, monetary part. This is what draws gold bugs, but their story doesn't quite add up. The unbalanced world economy still faces risks. But the most recent rises in the gold price have come against a strong dollar, which is normally a sign of weaker gold and continues to confound warnings of a collapse in the greenback. Oil prices are plainly far higher than they were, but they have come off their peaks. Moreover, there have been few signs so far that oil prices are feeding through to a 1970s-style stagflation. Nothing in either bond or stockmarkets suggests that investors see much danger of such a thing happening.
Bear on bullion Gold's renewed shine is best explained by thinking of the metal not as money but as a commodity dug out of the ground. In the past few years the price has climbed because mining companies stopped locking in prices by selling gold in advance—in effect, withdrawing a huge source of supply. Even then, gold has captured only 40% of the gains of other metals in The Economist's metals index, which has almost doubled since the start of 2003 thanks partly to fundamental demand from emerging markets and partly to investors in search of better returns than those from other assets. Gold would have done better had Chinese demand risen as fast as some expected; in fact, figures from GFMS, a consultancy, suggest it has been flat, even falling, over the past 20 years. Chinese investors now have other places to put their money.
Gold is still cheap compared with its peak of $850 in 1980. Today, adjusting for changes in American consumer prices, it is worth only a quarter as much. Gold bugs might see that as a chance to buy; others as a reminder of gold's enduring capacity to disappoint.
$850/ Troy Oz. in 1980 dollars. Even discounting that last year of Carter-flation, that would require a spot price of $2,073.2/ Troy Oz. today to break even if you bought
"The price is an omen of rampant inflation; bonds are doomed; the dollar is about to fall prey to the United States' reckless deficits; the euro will shortly be revealed as a worthless creation of bureaucrats.
Only the last will prove true....
I never understood the "barbarous relic" nickname.
Does anyone know WHY gold should or might be considered a "barbarous relic"?
I've never heard one of the gold hucksters on radio fail to proclaim that now was the time to buy gold.
Because the gold standard is an ancient standard. In order for a monetary standard to be valuable, it needs to be based on something truly rare. That's why I'm proposing that we move to what I call the "Honest Democrat" standard. If we base our monetary standard on something truly rare - the rarest thing I can think of is an Honest Democrat...
BUMP!
That was what Keynes called it.
Maybe because in modern society, the bulk of the economic GDP is services, not physical goods?
Out vast wealth is based on the knowledge of our workers. With modern technology, physical goods are of very little value. Probably 50 million farmers, and 50 million factory workers, could produce all the food and manufactured goods the world needs. The real value is in medical services, legal services, and entertainment.
If some wag posts pictures of swelling breasts, I for one will be offended. So I'm going to keep checking back to make sure that doesn't happen.
I always laugh when I hear the ads on radio telling me what a great investment gold is.
Usually by a company who is in the business of selling gold.
If it's so great, why are they selling it instead of hoarding it?
When was the gold market the hottest? When was everyone buying gold? When it went above $600 an ounce, about 23 years ago.
Remember the lines of people buying silver at $38 an ounce? It was going to $100. No, it topped at a little over $38. Silver just hit an 18 year high, at about $8.30 an ounce.
Where will gold go from here? I don't have a clue. But gold sellers sure are anxious to sell to me. If it is going to double, why are they so interested in selling to me?
You make a good point but there still is no reason why our money should not be backed with hard assets, is there?
Bears repeating.
Gold up $11.50 so far today.
Silver up .24 to above $8.50
Actually, in the 1980 squeeze, things were very interesting.
Gold topped at near $850/oz, while silver, at one point, reached a bit over $50 an ounce. Coming very close to the historical average of a 15-16 to one gold/silver ratio.
I've never understood the fascination with the 'gold standard'. It's like basing your money on tulips or some arbitrary substance you declare as the de facto standard for all that is valuable.
Yes, it is. Because our wealth is not physical, it can expand infinitely. If the money supply were based on a physical commodity, it could not be expanded to keep up, and massive deflation would have to occur.
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