Friday, November 27, 2009
By Rusty Goe
Few investments elicit as much emotion, irrationality, and frenzied buying, as does gold. Unlike investments in interest-bearing securities and common stocks, an investor invests in gold because he hopes that companies or governments will fail. Even oil, an asset prone to the volatility similar to that of gold, conforms to more supply-demand-like dynamics. Oil provides the fuel necessary for consumer-oriented societies. During prosperous times, demand—and the price—for oil will increase. During slack periods, demand—and the price—for oil will decline: under normal conditions, anyway. Gold's industrial demand, on the other hand, accounts for only a small percentage of its market value. A gigantic increase in jewelry buying would be required to rally gold prices, absent investment demand.
Still, gold pushers always insist that it's a good time to buy gold. Why? is the big question. I am in the business of buying and selling gold. As a professional coin dealer it comes with the territory. Thus, you would think I should be ecstatic when the rising price of gold makes the headlines every day. But I'm not. In fact, I am probably one of the most reluctant gold traders in the country—unless the gold is in the form of a rare coin struck at the Carson City Mint, that is. The reason for my reluctance to trade in gold bullion (Krugerrands, Maple Leafs, American Eagles, etc.) is I hate to see people buy things like it out of fear. And that's what so many people are doing these days.
Yet, gold's price rise this year has not come as a result of herds of physical buyers exhausting stockpiles of the yellow metal. It has been due to the weakness of the U. S. dollar and not gold's strength. In many ways, gold's landing in the limelight is reminiscent of the scenario we faced in late 1979 and early 1980. Jimmy Carter, a Democratic president, met with scornful disapproval, and the currency market constantly clobbered the dollar. Oh yeah, the U. S. faced military conflict in the Middle East, thanks to the Iran hostage crisis—what else is new?
Strangely though, inflation and interest rates were at opposite ends of the spectrum from where they are at in 2009. In comparing the two time periods—separated by 30 years—gold's day in the sun in 1979-1980 made more sense: inflation fears were justified.
In 2009, however, fear of inflation is just that: fear. For inlation has not ignited yet. With the Fed's printing presses working overtime, inflation might come roaring back in the future: but first we must see all the tricks the U. S. government has up its sleeve. In the meantime, arsonists such as Dr. Marc Faber, David Einhorn, John Paulson, Paul Tudor Jones, Peter Schiff, and Glenn Beck, have been pouring vats of gasoline on the tinder that surrounds the fragile, recovering world economies.
Einhorn and Paulson shrewdly made their fortunes by taking advantage of the economic turmoil brought on by financial institution's irresponsible investments in subprime mortgages. Now, they want to parlay their winnings by betting that inflation will rise again with a vengeance and deliver the knockout blow to the United States. Their hedge funds, and others like them, have bought paper contracts that represent over 800 tonnes of gold. These new gold bugs have been very public about the positions they have taken. Their vocalness has fueled the fire that has sent gold prices soaring.
If they are right, these hedge fund managers will add billions more dollars to their already bulging bank accounts. Gold's only purpose at the present seems to be as a medium to determine if these high-level investors will pad their portfolios, or if the U. S. government and the Fed can pull off a hail-Mary play to keep our country from slipping into the abyss.
Today, gold is the "hot tip" everyone is hearing about. Everywhere you turn, someone is encouraging you to get in on this "sure thing" When Obama fails to impress or someone in his administration—or at the Fed—says something that sounds stupid, the fear reignites, causing more people to jump on the gold bandwagon.
But if the past is any indication of the future, gold's overblown reputation for gauging the government's performance during tumultuous times will be exposed for the false panacea it is. Gold's glitter will not deliver us from evil. In the short-term, it might make men like Einhorn and Paulson wealthier, and it might give people who are disappointed with the United States something to rally around. But in the long run, gold will prove to be a disappointment.
It might not be wise for me to oppose the stand taken by such successful investors as David Einhorn and John Paulson, but I predict that gold will soon fall to its pre-October 2009 level of $950 to $1,000. By then, Einhorn and Paulson will have probably already cashed out and taken their profits. I won't feel sorry for them either way. But I will feel sorry for the Average Joes and Josephines out there who bought into this current wave of euphoria.