Gold’s decline shakes the true believers’ faith
The dramatic slide in the price of gold in the past week has reversed a rise that for more than a decade has been steady and seemingly inexorable. The sudden fall ‑ in which prices plummeted 9 percent, to $1,347.40 an ounce, on Monday, the biggest two-day loss percentage since 1983 ‑ has put goldbugs, who are by definition pessimistic lovers of certainty, into a state of high anxiety. When the commodity of last resort so conspicuously fails to hold its value, the world becomes scarier place.
There is room, however, for a small celebration: that the Cassandras have been caught short. Their simple remedy of faith in the abiding value of gold as a hedge against an otherwise treacherous, inflated market has been shown to be flawed.
There have always been those who have advocated cashing out and putting everything into gold against the day the stock market crashed, though the number of investors who genuinely found refuge in gold when the market crumbled in 2008 is probably fewer than goldbugs would like to admit. The flight to gold over the past dozen years has attracted a new form of ardent absolutist who suspects the Federal Reserve and the Treasury do not know what they are doing and who believes quantitative easing to be an evil process that invites inflation. These ideologically driven gold stashers are closely related to, indeed are often the same people, as those who advocate the return of the dollar to the gold standard. Such nervous creatures can only be reassured by the ancient lure of gold as a rock-solid reserve. For the past 12 years the rising gold price has appeared to confirm their lack of confidence in Keynesian manipulations of the economy. Since August, however, when gold started to lose its value, something has gone badly wrong.
It really doesn’t matter why gold has lost its glister, whether it is because troubled banks like the Bank of Cyprus are contemplating selling off all their gold to satisfy their country’s creditors while flooding the market in gold, or because of a general readjustment in all commodity prices, gold included. Gold’s fall shows that it is no different from other, more mundane commodities and that its special quality, an unimpeachable promise of retaining its value through the most turbulent of markets, is a myth. The market in gold is tossed by the same concoction of rumor, whimsy and conflicting signals as any other market. The difference is that the practical uses of gold — except as jewelry and in some industrial applications — are strictly limited. One of the few qualities to commend it is that it is easily shaped into ingots for hoarding.
Gold became a commodity that operated as a currency because it is in strictly limited supply. Its scarcity is its principal allure and enhances its value. But its lack of practical value also reduces its versatility as a traded commodity. Why should anyone, other than a hoarder, need gold? John Maynard Keynes saw little merit in the ritual of digging up gold in South Africa and shipping it for perpetual safekeeping in Fort Knox. He observed that such obscure transactions provided a small amount of employment but did not otherwise help an economy grow. Gold’s scarcity continues to commend it as a safe haven in an uncertain market. But for how much longer? The market has been heading upward for so long, it has come as a surprise to some goldbugs that the price of their favorite refuge can go down. Their faith in gold as an absolute bedrock, expressed to disbelievers with an arrogant air of conviction and complacency, is under challenge.
Central to the goldbugs’ belief system is that whatever governments do to boost an economy leads to inflation. Since Milton Friedman 30 years ago persuaded policymakers that the amount of money in circulation is the sole reason for inflation, so goldbugs have watched in alarm as the Fed has printed billions of dollars. In the past five years, however, despite an $800 billion stimulus and waves of quantitative easing, there has been no inflation. The role of gold as a surefire hedge against inflation is therefore redundant. The post-Great Recession readjustment is mostly being conducted not through inflation but currency fluctuations, with the dollar, the yen, the euro and the renminbi jostling to find a sweet spot that will leave their economies stable and prosperous.
Much of the allure of gold is a hankering after a time of certainty when currencies were backed by ample gold reserves. But this El Dorado is a fantasy. Michael R. Bordo, professor of economics at Rutgers, who has made a study of the comparative strengths and weaknesses of the three most recent currency regimes ‑ the gold standard, the system of fixed currencies established by Keynes at Bretton Woods and the modern regime of floating currencies ‑ concludes that Bretton Woods performed “by far the best on virtually all criteria.” The gold standard is not going to be revived, and those who continue to hoard gold will be deprived of their day of reckoning. They might just as well invest in bitcoins, another speculative commodity with limited supply that promises a false refuge from market uncertainty. But the price of bitcoins, too, wobbles around.
In his recent gloomy economic tour d’horizon, Ronald Reagan’s former budget director, David A. Stockman, was so despondent about the way the economy is being manipulated that he urged everyone to sell everything and put their assets into cash. “When the latest bubble pops, there will be nothing to stop the collapse,” he wrote. “If this sounds like advice to get out of the markets and hide out in cash, it is.” But then what? In the event of a widespread market crash, as Stockman predicts, hiding out in cash or gold will provide a false and temporary feeling of safety. Even if the cash is converted into gold as a hedge, it is the real market in goods and services where fortunes will be made and lost, even in a collapsed market. Hiding out in gold is like taking to a nuclear fallout shelter. Someday, you have to come out and face the world as it is.
PHOTO: One gram gold bars are pictured side-by-side at the Zlatarna Celje in Celje, April 17, 2013. REUTERS/Srdjan Zivulovic