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The Fascination with Gold
One of the more fascinating trends to arise in the wake of the financial crisis has been the renewed interest of the political right in gold. Today’s New York Times ran a story about the latest part of this trend: Utah has passed a law allowing gold and silver coins to be used as currency. While there is certainly a question of the constitutionality of this law, it’s interesting to think about the arguments and reasoning behind it.
The main idea driving the interest in gold is the fear that the US dollar will eventually collapse. Baring a failure to raise the debt ceiling before August 2nd, the probability of this happening is effectively zero (discussed at end of post). Besides, a collapse of the dollar would lead to a worldwide depression far worse than the Great Depression; I doubt having a form of currency based on a traditionally precious metal will be our greatest concern.
Investing in gold is actually a fairly risky action for a number of reasons. The first is that the price of gold, assuming the current trend of holding it rather than spending it continues, is effectively a function of how quickly it can be mined in South Africa. If the relevant companies mine a lot, the price will go down. If they mine a little, the price will go up. It has little to do with the actual intrinsic value of the metal, which is, if we are honest with ourselves, not that great.
But let us assume that gold does become a normal form of currency. What happens then? Well, as the amount of gold being used for currency increases, one would expect its value to fall. This would mean that any gold you held would be becoming increasingly less valuable. That doesn’t exactly seem like a great investment.
The market, as opposed to the advertisers on TV, is still making it very clear that US Treasury Bonds are the safest investment available. There are no indications from the bond market that investors think the US is facing a debt crisis or that the dollar is at risk. In fact, rates are currently falling, presumably due to both political parties contemplating austerity measures, indicating the investors are worried about more economic stagnation (due to austerity measures).
Treasurys are safe in the sense that you’ll get that 3.10% on the ten year note, no problem. The real issue is, what those 310 basis points will get you in terms of inflation-adjusted dollars. By the time Bernanke runs his printing press completely dry, you’ll have more dollars but less purchasing power. Kind of like if you’ve had money in a CD for the past year, you may very well have less real dollars even though you have more in nominal terms. Also, remember who the largest holder of US debt is: the Federal Reserve, which next month will complete its $600 billion second round of T-note purchases. So yes, Treasurys are in demand, but we need to keep in mind the primary driving force behind these low yields.
Fiat money printing is occurring all over the world. Investors have lost faith in currencies which are backed by nothing. I agree that gold has almost nil intrinsic value, but so does a rectangular piece of paper with a number on it. The key difference is, central bankers can’t print gold out of thin air.
Look at these two ten year charts and tell me which asset you think is a safer investment.
http://futures.tradingcharts.com/chart/US/M
http://www.kitco.com/charts/popup/au3650nyb.html
I’ve been hearing this claptrap about looming inflation ever since that Kenyan feller took the oath of office. Back in the real world, here’s a chart of monthly inflation rates:
http://www.inflationdata.com/inflation/inflation_rate/currentinflation.asp
The inflation rate in 2010 was 1.64%.
The inflation rate in 2009 was negative 0.34%.
Fear of inflation is a religion to some people. Austrian economics is a cult.
It would be funny, except that this lunacy might actually start influencing our government, and tamp down on the recovery.
joe, have you looked at a ten-year price chart of any commodity lately? Gold, silver, oil, corn, wheat, soy, coffee, sugar, etc. How about health insurance? College tuition? The prices of all these have risen much faster than the rate of inflation in the last decade plus. The easy money policies of the Fed have made the US Dollar into a laughingstock, and are currently annihilating the middle class.