Gold Tops $500 Exciting the Gullible

Gold bugs are fascinating people. They look like normal people, plain folks one might meet at church, in the mall or at work. But there is something very different about them. One cannot reason with them. As gold rose this week to a 22-year high, all the talk from these people was about how gold was coming back. If only the economics of the metal supported their belief.

The great spiritual leader of the Ogallala Sioux, Black Elk, called gold “the yellow metal that makes white men crazy.” Standing in his shoes for a moment, one can see why. Proximity to this magical element, or even the chance at acquiring some, had whites killing each other, tearing up the land, and generally doing things that got in the way of the buffalo hunt and the rest of the good life.

Unfortunately, Black Elk and his people failed to make their neighbors see sense, and much of that is historical. Gold has been a store of value and has served as currency for centuries in the Old World. Asian and Middle Eastern demand today still makes up a huge chunk of the gold market. But thanks to development and a less-than-Bolshevik Communist Party in China, there are lots of other places for recently enriched Asians to put their money – Shanghai property bubbles come to mind.

In fact, gold has underperformed since 2003 when the metals complex started its most recent run. Gold has made only 40% of the gains that the entire Economist metals index has made in that time. Oil, as an investment, has been far better a store of wealth – indeed, measured against the amount of crude it could buy rather than against a structurally damaged US dollar, gold has lost value in the last two years. The problem is that gold doesn’t generate revenue nor interest. It rises only because someone out there is prepared to pay more than the owner of it did, and someday, no one is, and the bottom falls out of the market -- again.

Still, there is no reasoning with the gold bugs. They will continue to buy, certain that the great gold rush is on. Some might make money if they cash out, but there are still folks who bought gold at $850 an ounce back in 1980 – they’re certain that it’s just a matter of time. In the 25 years since that peak, though, their money could have been working much harder. The Dow only reached 1,000 on November 21, 1980, and they’d be up 1000% today if they had bought stocks, including the meltdown of 1987 and the dot-com bubble burst. Still, one can’t make a wedding ring out of stock certificates, so the yellow metal still has some use.

© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.
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