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Gold Hits an All-time High Price! (Sort of)
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(January 9rd, 2008) As recently as 2001, gold could be had for $258/ounce. Jill Leyland, the World Gold Council’s chief economist says: “Gold was considered old-fashioned.” On Wednesday, 1/9/08, gold traded at $879.50, a price never seen before.
There is only so much gold to go around, and the major gold-producing countries over the past hundred years or so - South Africa, the United States, Canada, and Australia – are seeing their long-exploited in-ground supplies dwindling.

The world’s largest gold producer over the course of the 20th century, South Africa, saw its gold output shrink last year some 4.5% to 192.3 tonnes. Contrast that with China’s production, mostly from newer mines now coming on stream, which in 2007 will total some 191.5 tonnes. This puts China well on target to become the largest gold-producing nation in 2008.

The Wall Street Journal on 1/3/08 reported, in an article by Ann Davis and Peter McKay entitled “Oil and Gold Continue to Party,”

“The spotlight was on oil, which briefly hit $100 a barrel yesterday on the New York Mercantile Exchange before closing at $99.62, up 3.8%. This was the highest close ever, and is just $3.19, or 3.2%, below its inflation-adjusted record of $102.81, set in April 1980 in US cash markets.”

As to gold’s nominal ‘record’ price, the WSJ goes on to note that inflationary realities since 1980 mean that gold really hasn’t yet done much of anything:

“...Like oil, many…commodities are closing in on their inflation-adjusted highs or have surpassed them. Gold is an exception. It closed at a record $857 an ounce on the Comex division of the Nymex. That was up 2.65%, though it was still considerably shy of the mark $2,287.00 in 1980 when adjusted for inflation.”

Alan Abelson, Barron’s January 7, 2008:

“Actually, we can understand why folks, especially those of a chronically cheerful disposition, shy away from gold. It is, after all, the nearest thing we have to a Dow Jones Average of Global Misery. We are a nation of optimists, and real optimist would just as soon drink a quart of sour milk as own something that keeps reminding him that everything isn’t hunky-dory.”

Putting aside the question as to whether a real optimist would ever read Mr. Abelson’s column in the first place, he does hit on the psychological truth that gold is more suited to the realist rather than the cock-eyed optimist.

That same issue of Barrons (1/7/08) is a handy guide to putting today’s economic situation in a nutshell. Scanning the titles of some of the major articles featured, we see a snapshot of US investor moods in the first week of 2008:

“Wolf at the Door” “Ok, this is Serious” "The Outlook Darkens for Metal Benders” “Staying Afloat in a Sea of Worry” “Will Year-end Swoon Carry Into 2008?” and “The Jobless Spike: Sign of a Recession?”

The psychology which flavors the world’s markets is hugely interesting. Much can be learned by examining the terms and phrases with which we tell each other stories about ‘what’s going on’ out there in the big world of economics, politics, world trade, and, of most concern to us, the value relationship between the world’s currencies and the most real money in the world, gold. Public perceptions of economic activities are what drive actions, and those actions are manifested in gold and currency markets. After all, the behavior of fiat currencies is nothing more than a game of confidence, or, to put it more precisely, a confidence game.

And today, with $850+ gold, $100 oil, “beans in the teen,” and premonitions of a US recession in the offing, what exactly could anyone’s level of confidence be?

I heard from an old college chum last week, and he shared some thoughts which point out a fundamental case for gold, entirely independent of the vagaries of money and credit creation:

“Something on your site gave me a thought, and I hate to pass up such rare behavior on my part. If I’m reading this whole deal right:"

"-The total amount of refined gold acquired and accumulated by H. Sapiens is estimated to be something like 130,000 tonnes so far."

"-An average of approx. 2,500 tonnes is added to that total each year – an arithmetic, or additive growth rate."

"-H. Sap’s population is growing by something like 2% per year – an exponential, or compounding growth rate."

"…It seems to me that if one projects the relative effective growth rate of the two quantities (Homer Saps vs. Troy ounces), over time, one ends up with a very great (and accelerating) increase in gold’s scarcity, which you expressed as “…about 2/3 ounce..per person…” in a 2004 article. Seems like one ends up with it pretty damn quick, too, viewed in any kind of a broad time context."

"As Jethro Bondine might have asked, “Do I got my basic ciphering right, Uncle Jed?”

I believe that old friend has it essentially right. And the unstated question is, how much gold do you own?

Javier Blas, in a Financial Times website article of January 3, 2008, points out the fundamental change brewing in gold ownership today. Once a marker of private wealth, in the middle of the 20th century gold came to be primarily owned by governments the world over. Today, we see that trend reversing as people increasingly purchase gold in physical and electronic form to protect themselves against the unchecked and inflationary creation of ‘money:’

“This change in investor attitude is reflected, for example, in the ownership of hundreds of 400 ounce gold bars, glowing under a dim light in a vault deep beneath the streets of London. Only a few years ago, it would have been safe to assume that a central bank was the owner of that gold. No longer. The bars belong to private investors in the New York Stock Exchange-listed StreetTracks Gold Shares, an investment vehicle that holds about 627 tonnes of bullion – about double the Bank of England’s bullion reserves and more than those of the European Central Bank.”

-Richard Smith

 

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