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Gold Perplexes
(October 27, 2010) Gold reached a record US dollar price in October, continuing a trend of nearly a decade of consistent year-on-year increases. Many now discuss a gold bubble - but no one can say with certainty how close we are to it. As always, there are opinions…
This past weekend, John Authers’ column “The Long View” in the Financial Times of 10/24/10 was entitled “Remember 1980: All That Glisters is Not Gold.” Although I don't know if "glisters" is a typographical error or British slang, he has my sympathies right off the bat as he opens with this:

“I never enjoy writing about gold. It is not that I have anything against the metal; its importance to the financial system is undeniable. Over the past few years, gold has performed fantastically well, much reducing the pain for those who have taken losses on stocks, property, and credit. All of this is true.”

“The problem is that gold – more than anything else in the world of investments – defies rationality. Its intrinsic value is in the eye of the beholder. And the case for and against gold tends to get mixed up with both ideology and emotion.”

Authers goes on to describe the opinion of gold’s “true believers” that gold is the ultimate store of value, and suggest that gold is instead the “ultimate speculation.” He writes;

“Under the usual definition, “investment” turns into “speculation” when investors no longer look at the underlying value of an investment but rely on the price to rise so that they can sell it to someone else. By this definition, gold is always a speculation. There is no income stream to be derived from gold, in the way that dividends come from stocks, rent from properties and coupons from bonds. Demand for it is not driven by economic forces, so it is not like oil, agricultural commodities, or industrial metals. If you do no happen to want gold jewellery, your only reason to hold it is a belief that its price will go up.”

What is missed in that last sentence is that the concept of “its price will go up” makes no sense to those who have serious doubts about the future of today’s fiat currencies and assorted cyber-assets. The gold itself is the thing, so who really cares how many Zimbabwean or American dollars you might receive for it in the future?

Gold is attractive now primarily because of the widely held realization that what passes for money these days is no longer a workable store of value. Anything so easy for governments and their central banks to create, literally by the hundreds of billions, is not something that is likely to hold much value over time. What Mr. Authers seems to miss is that many gold owners today, peering at the world’s currencies, see the possibility of a very dark future indeed. By contrast, gold is shiny, eternal, and simple. Today, that seems quite enough.

In the same issue of the FT, we find another article about gold. Gillian Tett’s column “An Anthropologist in America,” opened with the following:

“Last month, I chaired a dinner conference on gold “Exchange-traded funds” at New York’s Tutankhamun exhibition. It felt like attending a church revival meeting. As I faced a crowd of well-dressed financial advisers from premier Wall Street banks, there were cheers and rapt applause. There were even angry, wine-fueled heckles when I asked if gold was in a bubble. This was not your normal investment event – no mention of capital asset allocation models or anything too technical.”

…”Now, as western national debt levels spiral, faith in government is also wobbling. Or, rather, faith in the ability of the state to honor debts and maintain the value of money. ..That plays into goldbugs hands. Gold’s value does not depend on big government. It seems permanent, tangible, immutable. This is attractive, in a world of complex, disembodied cyber-finance.”

Ms Tett seems to have grasped the psychological appeal of gold in today’s world – it serves a seldom-recognized role as comforter, sleeping aid, and security blanket. Gold is in many ways the perfect element for our time.

Which makes it hard to believe that gold is in a bubble. Gold, for centuries the most portable and efficient store of wealth in the world, is still woefully under-owned by the majority of the Western world. Sure, it is increasing in popularity, but its penetration into our culture is still slight.

We have been selling gold via this website for about a decade now. When we started out, gold could be bought for around $270 per ounce. No one wanted it. At that time, the gold market, following a brief boom during the pre-Y2K panic, was low-volume and lethargic.

Ten years ago, the most rational argument for gold was that gold as an asset class was simply too cheap to ignore. As we repeated that phrase to anyone who would listen, we learned a lesson about marketing: you cannot motivate people to buy something by telling them that it is 'too cheap.’

Gold bullion sales only increased for us with the advent of higher prices, and tumultuous times. Today, attention is certainly being paid to gold. And it's no wonder: Gold’s price in dollars has more than quintupled over the past nine years. If it does that again, its price will be over $6500 per ounce.

Is gold in a bubble? Does gold’s nearly six-fold increase in dollar price over the past decade, signal the end of its run?

Or is gold, now recognized for, in Ms Tett’s word, its “immutable” worth, merely starting to build a base of support among those who have assets to protect? Will that trend continue, as people realize the difference between a ‘currency’ which is only useful for spending, versus a true ‘money’ such as gold, which can be trusted, forever, as a store of value?

While the question is, of course, unanswerable, the debate is important. To paraphrase a line from the late John Lennon of Liverpool: Gold is a concept by which we measure our financial pain.

Thinking of gold unemotionally, there is really only one practical question that each of us has to ask ourself: Do I own too much, or not enough?

-Richard Smith, October 27, 2010


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