Eric Fry, reporting from deep within the fog of post-
holiday merrymaking...
As gold inches ever closer to $500 an ounce, many long-time
gold bugs can scarcely believe their eyes. The barbarous
relic has not kissed the $500-mark since 1987. Over the
ensuing 12 years, the gold price plummeted against the
dollar, bottoming out at $252.50 on the final day of 1999.
But since that fateful day, the yellow metal has been
trudging steadily higher – nearly doubling in price over a
time span that has seen the Nasdaq Composite Index LOSE
half its value and the S&P 500 Index fall 10%.
Even so, the ancient monetary metal seems to have gained
very little respectability among American investors. As
recently as January of this year, in a column for New
Yorker Magazine, financial writer James Surowiecki
disdained gold as a "collective hallucination."
"Gold is valuable only as long as we collectively agree
that it is," said he. "It may be soft, shiny, durable, and
rare, but it has no more intrinsic value than feldspar or
quartz...Buying gold is the purest form of
speculation...You're buying into a collective hallucination
- exactly what those dot-com investors did in the late
nineties. One could say that gold is the biggest, most
durable bubble in history."
Your editors begged to differ. In the January 18 edition of
the Rude Awakening, we replied, "What is a U.S. dollar? Or
a share of Google? Or a 30-year Treasury bond? Aren't these
paper assets merely derivatives of a hallucination?
"To rephrase the question: If we investors are all
hallucinating to some extent, might some hallucinations be
more benign than others? Might the current market value of
gold, for example, be a less dangerous 'hallucination' than
the current market value of a dollar bill? Even conceding
the fact that our eyes may be deceiving us, we think we
perceive more value in an ounce of gold costing $432.00
than a U.S. dollar costing 1/432 an ounce of gold. Indeed,
we suspect that the dollar's illusory value is the sort of
deceptive apparition that entices unsuspecting investors to
stroll off a financial cliff.
"In the sterile environment of pure financial theory,
Surowiecki makes a valid argument. But when exposed to the
virulent microbes of real-world economics, his thesis
degrades rapidly. To be sure, the value of EVERY asset in
the world relies upon a collective judgment - or
hallucination, if you prefer. But this is hardly a
groundbreaking insight. No financial asset - gold included
- possesses an absolute, eternal value. Rather, all values
are RELATIVE.
"However, any financial asset whose relative value remains
somewhat constant over time is deemed to be a 'store of
value.' In this respect, gold has proven itself to be an
extremely lifelike hallucination - having successfully
retained its value relative to competing assets over
several thousand years. The same cannot be said for paper
currencies or government bonds, both of which routinely
find themselves cluttering the waste dumps of financial
history."
Perhaps our eyes continue to deceive us, but the gold rally
appears more lifelike every day. And as gold moves steadily
higher against ALL the world's major currencies, it steps
out of the shadows of seeming irrelevance into the bold
light of real-world demand. In other words, gold is moving
higher because long-term investors genuinely want the
stuff. Gold is rising, Bloomberg News recently explained,
"on signs of increased demand for an alternative to
currencies." This story line is so ancient that it has
become brand new.
A $500 price tag, therefore, emphasizes the yellow metal's
long march back to respectability and relevance. Gold
currently sits an 18-year high. At $514 an ounce, it would
reach a fresh 24-year high!
Gold's flirtation with two-decade highs is not merely a
curiosity for the gold-bug cult to behold. It is also an
indictment of the global faith-based currency regime....and
we think the charges are warranted. The world's faith-based
currency regime deserves gold's indictment. Which is why we
suspect that the NEXT $500 rise in the gold price might
arrive much more swiftly than the last.
Paper currencies, it bear remembering, roll off of printing
presses controlled by politicians and ignite when held
close to open flames. By contrast, gold, as James Grant
points out, "is recoverable at five parts per billion from
the earth's crust and has no central banker."
Gold's scarcity does not accord it any automatic
value...but it doesn't hurt, especially amidst the
exploding population of paper currencies and financial
derivatives.
"Just because gold has a long history of being used as
money, Surowiecki scoffed, "doesn't mean that it has a
future...In the speculative imagination, gold remains the
best hedge against Armageddon. It also remains a testament
to the tenacity of popular delusion."
Gold also remains the best hedge against the popular
delusions that support currency values. Net-net, gold's
behavior in recent days - as well as its behavior
throughout the millennia - suggests that some investors are
finding gold useful to hold in their portfolios, even if
the monetary metal is not absolutely essential.
One year ago, a colleague approached me to ask whether he
should sell his gold coins. In short, I replied, "No."
"But one of the other editors here at Agora thinks the
dollar is due for a big rally."
"I agree," I replied, "But that doesn't mean gold will not
rally even more. I would suggest doing nothing."
And so it has come to pass...Since that conversation late
last year, the U.S. dollar has gained 13.7% against the
basket of foreign currencies in the dollar index, thereby
enabling the dollar bulls of late last year to congratulate
themselves for a timely contrarian call. But gold has
soared 27% against that same basket of currencies...thereby
enabling your editors to characterize their inertia as
genius.
Because we suspect the gold rally is still much closer to
its starting point than its ending point, we also suspect
that the column we presented on December 28, 2004, is even
more relevant today.
End