The Time is Surely Not Far Off

[As summer prepared to give way to fall seven years ago, there was real change in the air. Gasoline prices had surged to $3 a gallon in the wake of the devastating Gulf Coast hurricanes and some people were really starting to worry about the housing bubble. Of course, not enough policy makers shared this concern, not the least of which was future Fed chief Ben Bernanke who, over the summer, cited strong fundamentals in the housing market as immortalized in the beginning of this video. What was also bubbling beneath the surface was the gold price that, on the day this item was published on September 15th, 2005, checked in at $455 an ounce and was poised for a sharp move higher in the months that followed.]

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As gold makes attempt after attempt to once again surpass and hold the $450 per ounce mark and then take out the $457 level that marked a new 18 year high last December, more and more commentaries about the yellow metal are popping up in all sorts of places. Somehow these recent commentaries are different.

It used to be that there were only two sides to the gold story - the story told by economists and the story told by gold bugs.

The economists would say that gold is a “barbarous relic” that pays no interest and has been relegated to its proper place as but a footnote in history - that today’s financial wizards are wholly capable of managing fiat money and that the world is a better place without the restrictions on money creation that were in place when money was linked to gold.

The gold bugs would respond by pointing out that today’s fiat money has no intrinsic value because it is backed by nothing other than confidence in the government and the central bank which issues it - that ultimately, it will revert to its intrinsic value because of promises politicians can not keep and the hubris of central bankers.

Today there seems to be a growing middle ground when it comes to gold. Some question the current relationship between the oil price and the gold price and note that it is far from historical norms. Others wonder why gold has nearly doubled in value since the technology boom went bust and real estate became the world’s primary driver of wealth creation.

An excellent example of this new middle ground is this Buttonwood column that appeared in The Economist the other day. This excerpt makes clear that at least one economist at The Economist is a bit perplexed with his current understanding of gold’s place in the world. The writer seems less perplexed about gold’s future.

Just as inflation has, until now, lain low, and gold with it, America’s dollar has also been resisting arrest. Gold is after all a monetary metal, an alternative to the paper currency that replaced it at the heart of the world’s trading system, when times are tough. But they haven’t seemed tough so far. Despite America’s famous twin deficits, everyone else’s currency has been even less appealing, and big exporters such as China have had their own reasons for propping up the dollar. Now, as Katrina heaps billions on a national debt that is already close to $8 trillion, might that perception change? The time is surely not far off.

For at the end of the day, the price of gold reflects confidence, more than anything. When people are confident that their central banks will control inflation while permitting the economy to grow, when they believe that paper assets are worth something approaching their face value, they buy gold to wear but not to put in a safe. Alan Greenspan has achieved the remarkable feat of suspending disbelief in America’s gerrymandered finances for the past few years. On his departure, watch the gold price soar.

What do we think? We think everyone should own at least two one ounce gold coins so that occasionally they can be held in one hand - to appreciate the density and the weight, to admire the luster, and to hear the sound that is made when precious metal comes in contact with precious metal.

We also think a number of coins far greater than two would be preferable to just two.

As we write this today, gold has once again topped the $450 mark and looks to soon be making new 18-year highs. Then it’s on to new 25-year highs in the $500 range, at which point, we sense that the world will start noticing gold in a big way, regardless of what economists say.

Got gold?