Gold’s decline shakes the true believers’ faith

By Nicholas Wapshott
April 17, 2013

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.

Nicholas Wapshott’s Keynes Hayek: The Clash That Defined Modern Economics is published by W.W. Norton. Read extracts here.

PHOTO: One gram gold bars are pictured side-by-side at the Zlatarna Celje in Celje, April 17, 2013. REUTERS/Srdjan Zivulovic

31 comments

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Goldbuggers: They never learn…

There is a wealth of wisdom in this article, but not one goldbug will change their obsession with the unreal. People and their gold… It’s time to invest in housing, especially those mortgage-backed pools behind Collateralized-Debt Obligations backed by Credit Default Swaps, of course. Housing prices never, ever go down. Stock and bond prices too, except for once in a while for very short periods of time. Trust me.

Posted by ptiffany | Report as abusive

Yes, always trust the people with printing presses and a penchant for running up huge bills. Of course you can trust them to act in your interest rather than their own.

The price fall is the result of supposedly gold-linked paper assets which can be sold short in large quantity. Right now, it is very difficult to find US Treasury gold or silver bullion coins at the prices the media is touting. Those who have the actual gold and silver are not selling it — just those who bought paper assets supposedly related to actual gold.

It is a market manipulation.

Posted by usagadfly | Report as abusive

“goldbugs, who are by definition pessimistic lovers of certainty,”

Okay, my sole holding of gold is a pair of cuff-links from my father-in-law, but there are so many logical and argumentation flaws in this article that it is hard to find a place to start; I guess the previously quote will do.

Definition… really, give me a link where the word ‘certainty’ or ‘pessimism’ is used to define goldbug. In my reality, google returns an infants clothing line as the top line on a search for ‘goldbug’

“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.”

Sort of like Barney Frank and subsidized real estate? Now there’s a combination that should delight Keynesians.

Posted by ARJTurgot2 | Report as abusive

What a decline …. in one day 400 tons sold in futures. Now that has so much economic sense… if i want to make some profits on gold i just pour 400 paper gold in the market. Much more logical than gradually sell in order not to push the price down so hard and lose money. But hey gold is so “old fashion” and only “goldbugs” stash it. There is no reason to do it unless u have some obsession with the past, since the world economy is going so well. Economies rise and shine in US, EU, China and Japan so you must be mad to stash physical gold. Oh my god … don’t all major central banks expand physical gold on their balance sheets all year long ? Doesn’t Bundesbank buy physical gold and returns it’s physical gold back in Germany? Those big “goldbugs” must be mad to do that. They know nothing …

Posted by Kupepe | Report as abusive

Finally the truth is told. The physical gold scammers are revealed. Mad people and goldbugs stash gold only. And why should they since the world economy is up and running. US, EU, China and Japan all are growing so fast. Only the printing of USD and JPY is faster.

But hey only mad people and goldbugs stash physical gold. Wait a minute the central banks of India, Japan, Italy, UK, France, Netherlands, Russia, UK, Germany and Fed are expanding the physical gold reserves on their balance sheets. Germany is repatriating its gold from the UK and the FED. THEY KNOW NOTHING … .or do they ? Those “goldbugs” …

Posted by Kupepe | Report as abusive

Gold is not an investment to replace stocks, bonds, and printed cash. Gold is an insurance policy to balance the risk of holding stocks, bonds, and printed cash. The risk of gold falling to near zero value is low.

If the paper dollar can buy more gold then more people can buy more gold.

As for gold being compared to a nuclear fallout shelter, nuclear fallout shelters can also be used for the much more frequent tornado. Then there’s North Korea, Iran …
Someday, you have to duck, cover and face the world as it is.

Perhaps gold can also be compared to that gas powered generator that is nice to have for those stormy periods when one’s household is knocked off the regular power grid. It could certainly get swept away by a direct hit from a storm surge but that possibility doesn’t make it a bad product to buy.

Gold isn’t a magic shield, but it has a place in portfolios.

A two week supply of bottled water, canned goods and Pop Tarts can’t hurt either.

Posted by MICHAELDONELLO | Report as abusive

Every explanation of why the value of gold is determined differently from the value of other metals comes down to one thing: psychology rather than utilitarian demand in things like electronics manufacturing. When a market is driven upwards by psychological factors, we call it a bubble — or at least we do when the market is for anything except gold. Let’s be honest about gold. It’s bubble money.

Posted by Bob9999 | Report as abusive

There has been since the various crisis’s from 2007 a growing disconnect for gold prices and their actual production costs.
Is gold a commodity or a magical substance? ie Money!
I think the floor price should be the average extraction costs, add say 20% profit then add something for FEAR & GREED and presto !!

Posted by ifnotwhynot | Report as abusive

The journalist has got it wrong…any true goldbug will be sitting on their bullion like a tick on dog!

The only gold being “sold” is the fictitious paper gold made up to manipulate the market.

Besides, the fundamentals for owning gold & indeed silver haven’t changed – the US is broke, the UK is broke, the 4th Reich is broke, most economies are awash with money so fresh the ink is still wet, there are squillions of $s in fictitious “investments” CDSs / derivatives & their ilk.

All it will take is some smart alec to launch a major cyber attack & cause a MAJOR crash – THEN you will see how much your equities/bonds/derivatives are REALLY worth!

As an example – take the supposed terrorist attacks on the WTC – the markets locked up – no values, no trades…zilch!

Yep..you can clutch you wad of share certificates & bank notes – but when the nasty hits the fan, all you will be holding is a pile of paper.

OK you can’t eat gold/silver – but they’ve been stores of value for millennia – find me a FIAT currency that can say the same..I’ll give you 5 years to come up with an answer.

Posted by randburg100 | Report as abusive

Not only can’t you eat gold, no one else can either, and in a real economic melt down, no one will give you anything for it. It only has any value while we still have a semblance of an economy. In real hard times, knowledge on how to do real things has value. If you know many practical skills and practical information your better off. But then that is always true.

Posted by brotherkenny4 | Report as abusive

The hype against gold is over-done. The argument against gold and other metals is the carrying cost. The arguments for gold and other metals remain the propensity of central banks to inflate the supply of money and credit to boost the economy and off-set the dysfunctional fiscal policies that politicians and supra-national agencies implement that work against the national and international economy. The drop this week was triggered by the Federal Open Market Committee’s release of the minutes of its previous meeting. The market registered the expectation of rising interest rates, and this changed the outlook for price appreciation and the carrying cost of gold and other metals. Silver and platinum prices dropped along with gold prices. Margin related selling undoubtedly propelled the decline. Short-term moves in the price of commodities in response to statements on monetary policy rarely indicate a profound change in the fundamentals under-pinning investment in gold. Speculators being speculators, a rush for the exits on the first hint of an adverse wind is not unexpected. Governments on the other hand are never reticent to increase the supply of notes and credit without end, so in the long-run, the price of gold and other commodities which are generally in limited supply can be expected, over the long-run, to rise steadily in price relative to paper money.

Posted by highlandlad | Report as abusive

@Brotherkenny4, you are missing the fundamental point – gold IS money, not the pieces of toilet paper issued by the Fed, the BoE, the ECB etc etc. Gold has been store of wealth and IS wealth.

In a meltdown the holder of gold & silver will have something to trade…try doing that with a $100 bank note… Besides..the Romans did quite well without paper ‘money’; when ancient Kings etc were buried, they were interred with gold – not pieces of paper with pictures drawn on them…

But what you say is true, information / skills are good – but a combination of those + resources/tools + gold/silver & you’re away!

Posted by randburg100 | Report as abusive

Time and time again this portal shows how bad its journalists and pundits are. Wapshott doesn’t understand economics nor the fundamentals behind gold, and all he can do is to call people names and make stupid unfounded analogies.
As for Federal Reserve and Treasury officials knowing perfectly what they are doing – they have just admitted that they are flying blind – their own words. Wapshott – you are a disgrace to rational thought and honesty.

Posted by KelThuz | Report as abusive

Money is simply an artificial method of transporting excess labor and knowledge through time and / or space. This amount of my work translates into X units of money which can be exchanged for someone else’s work somewhere else or at a later time.

When that mechanism is controllable by a third party who uses that control to profit, you have a “monetary authority”. Once, it was a trustworthy “mint” that supposedly guaranteed purity and weight of the exchange medium, most often silver, gold, or copper in one form or another. The head of that authority was stamped on the piece of metal, called a “coin”, to assure purity and weight.

When paper “receipts” were issued, the path to corruption was created. With computer record keeping, the temptation has become universal. “Money” is now the property of the State and is manipulated for political purposes, with an intended side effect of transferring the saved labor of others to the powerful for pure greed.

Gold and silver have value because as tangible, non-manufactured items they are much more resistant to manipulation and expropriation. Whatever their weaknesses, if possessed physically they have a much greater likelihood of storing surplus labor than Government or Bank paper, or bits in a database. No, they are not food. They are for value transportation and storage.

Posted by usagadfly | Report as abusive

Most of the true believers are just dupes of the many, many gold advertisers on Fox News. The real winners are the so-called purveyors of gold to the fearful, the paranoid.

Posted by explorer08 | Report as abusive

Most of the true believers are just dupes of the many, many gold advertisers on Fox News. The real winners are the so-called purveyors of gold to the fearful, the paranoid.

Or for those outside the US …yes, surprisingly there ARE such places….those who can see the US $ collapsing along with the euro funny money , sterling…..and distrust the FIAT financial “systems” as little more that titanic ponzi schemes underpinned by fraud & lies!

Posted by randburg100 | Report as abusive

I’m no gold bug, but this is a badly misinformed article.

Gold is a global market, and the main buyers are Asians. To some extent they are driven by the same suspicions of western money-printing that drives American goldbugs. But Asian cultures have been buyers of gold forever, and most of gold price’s rise in the last decade can be explained very simply by Asians’ incomes going up in dollar terms.

As gold kept rising and rising, western financial investors cottoned on and began taking positions, mostly through the SPDR GLD ETF. Western goldbugs, who shun ETFs believing them to be phony “paper gold”, prefer coins. But they are a tiny market, a small cut out of large flows of gold leaving the US and most of Europe to vaults in Switzerland and private safes and adorned bodies and homes in Asia.

The western goldbugs may have been ideologically influential in helping drive gold prices upward. Their argument was that money printing must unleash inflation. That argument probably sounded plausible to many Asian buyers, and continued Asian buying as the price rose in 2009-2011 encouraged western financial investors.

The gold price bust began last year, when large flows into SPDR GLD drove the price up past $1900. Meanwhile Asian demand was falling off as income growth in dollar terms slowed in China and went into reverse in India. The GLD investors were caught long, and gold soon retraced to $1600. The further sell off this year owes to three main factors: Asian demand remained weak; dollar inflation remained low growth despite increased monetary stimulus, further weakening the goldbugs’ argument; and western financial investors who were only in this looking for quick gains became disillusioned and impatient and dumped out of their holdings.

Gold remains a very good hedge against inflation. That argument for gold hasn’t been disproved at all. But gold’s price was being pushed up much faster than inflation, and much faster than Asian incomes were raising. That had to blow off.

Posted by tom_the_bear | Report as abusive

The answer to your seeming quandry about gold and gold prices is simply this:

(1) IF the economy is based the gold standard, it can safely be held as hedge against inflation.

(2) IF the economy is based on fiat currency, it becomes simply another commodity, and will behave accordingly.

Thus, for anyone to believe in gold as a hedge against inflation in the present day fiat currency economy is a fool.

Posted by PseudoTurtle | Report as abusive

@PseudoTurtle – sorry, but you’ve got it totally backwards.
“IF the economy is based the gold standard, it can safely be held as hedge against inflation.” – if the currency is based on the gold standard then inflation can only come about by gold production. Holding gold to hedge against inflation in this scenario would be like holding oil to hedge against the price of oil going down.
“IF the economy is based on fiat currency, it becomes simply another commodity, and will behave accordingly.” – only if you choose to ignore the fact that gold has held a very special position in the human psyche for millennia as a store of wealth. Gold will never be “simply another commodity” for that reason alone.

Posted by RandomName2nd | Report as abusive

http://twarr1.blogspot.com/2013/04/whats -behind-gold-price-plunge.html

Most of the price pressure has come from uncovered short futures positions. This isn’t unusual in itself, considering the technical status and alleged overbought condition of the market. But we need to look at the bigger picture to get a clear understanding…

Posted by twarr1 | Report as abusive

Ok….hands up who’d rather have a pile of paper share certificates/bank notes with pretty pictures on them as opposed to gold bullion?

Before sticking your hand up – go and look at usdebtclock.org and watch the US national debt increase at the rate of $2 BILLION a day; the total of which has risen 75% in 5 years. Total US debt within a whisker (relatively speaking) of $60 TRILLION! Let’s face it – the US is broke & running on fresh air plus ‘money’ magicked out of thin air….as are most FIAT based economies – OK I might be corrected to “all FIAT”;)

Besides….the titanic Ponzi scheme we’re running was only foisted on us peasants very recently & can ONLY operate through the creation of more debt.

But if the market manipulation by JPM & their ilk means it drives silver & gold down for a while..bring it on…just means I can buy..or rather swap more more useless paper.

Posted by randburg100 | Report as abusive

@ RandomName2nd —

From a strictly economic viewpoint, I stand by what I said.

From an emotional viewpoint I agreee that “only if you choose to ignore the fact that gold has held a very special position in the human psyche for millennia as a store of wealth.

However, you are wrong that “Gold will never be “simply another commodity” for that reason alone.” Aside from it being a relatively expensive commodity, it is nevertheless nothing more than a commodity, and will act pricewise as such.

In other words, a bad investment — if you are looking for security — in a fiat economy.

Posted by PseudoTurtle | Report as abusive

Goldbugs and people worried about the world fiat money system welcome the price drop. Sales of physical gold in India, China, Australia, even the US, has exploded since the paper gold price drop. Try to buy and take delivery of physical gold anywhere near the paper gold price. Anywhere in the world.

Posted by travelsoon | Report as abusive

Sell Gold. Buy Tulips! Precious commodities are whatever the financial community and societies make them. Better yet, visit a casino for instant gratification (or not). It is only the odds that vary.

Posted by ArghONaught | Report as abusive

Went to Macau last Friday. The jewellers shops were packed with people buying gold stuff, you could hardly get in the door. Maybe they need to be told that gold has little value. Maybe there something strange about the current plunge in prices.

Posted by Panglot | Report as abusive

Gold is too easily manipulated by those who possess a lot of it. To those people I say …..Eat your gold.

Posted by Doc00001 | Report as abusive

There is no need to evangelize for gold and silver. No need whatsoever. What is needed, and is obvious to anyone who will actually read the posts here, is to evangelize for unlimited paper currency.

In a fiat currency situation such as the USA finds itself in, with essentially unlimited printing of money and with that money almost entirely going to the top 10% of the wealth distribution, it makes no sense whatever to “save” the paper scrip. It is value being expropriated by the State through the hidden, indirect tax of “inflation”. Spend it before it evaporates. This is not healthy for any economy.

Obviously, what is coming is an outlawing of the individual owning of precious metals, thus forcing all “savings” to easily expropriated paper. In effect, it will simply encourage yet more capital flight from the USA.

Paper currency is only viable when the monetary authority is trustworthy. And that structure is itself an invitation to theft.

Posted by usagadfly | Report as abusive

Gold is a speculative commodity. It is not a investment. Real investments have the potential to create jobs and, on occasion, earn income for the investor. The government controls the currency, for better or worse, but the value of gold depends entirely on the greater fool theory. Unlike useful commodities like oil, corn, etc., there is almost no one who actually needs gold.

Posted by QuietThinker | Report as abusive

It is quite amusing to read the peeved apologetics of the gold advocates here. On the one hand, they deride “fiat” currency as a tool of the state, on the other, they encourage stashing one’s wealth in a form they readily admit is easily manipulated by “paper” gold traders, short sellers, JPMorgan and–surprise, surprise–the state. The fact that a cabal of thieves stationed at a few trading desks can use their smartphones at lunchtime to just step up and fleece gold investors of 10% of their holdings, or that a few central banks who regularly coordinate their operations can alternately flood or parch international gold markets at will, somehow REINFORCES their conviction that gold is the most secure of investments. Their shrill conviction isn’t the result of rational analysis; what we’re witnessing is a form of religious faith.

Posted by SkepticReader | Report as abusive

Gold is garbage. Goldbugs are blissfully unaware that the Earth’s core is 10% molten gold or that gold can be synthesized from heavier elements such as lead via neutron bombardment. Someday the cost to do that will go down enough so that the gold market will be flooded with synthesized gold, and the game will be over. Gold is a scam like diamonds. Unlike silver, gold has almost zero industrial application. Gold is a religion, not an asset class.

Posted by Dunkleosteus | Report as abusive

To Dunkleostus,
Gold is extremely useful in the field of electronics where it is an excellent conductor better than copper and second only to silver. It is also a sterile material. It does not corrode like copper and silver do. Copper is used in electronics because gold and silver are far too expensive to be used in such menial applications as wiring (en masse, that is) and plumbing. Its extreme weight and density would make it useful ballast. Did you know that an average cellphone contains $.50 worth of Gold? Think of all the various different applications of copper, were Gold significantly cheaper it would replace ALL of them. Why on earth use copper wiring when you can replace with a non corrosive gold alloy that is better a conducting electricity? Why use copper pipes when you can use gold pipes? Why use copper plated anything when gold does not corrode and can be spread as thin as sheet of paper? I am not a gold advocate, I advocate fiat currency, but your assertions that gold and I quote “has almost zero industrial application” reveals amazing ignorance. And to say that it is a “scam like diamonds” really? Diamonds are the hardest known substance in the universe, if you are implying that diamonds too have no industrial applications is also laughably ridiculous. Gold is highly prized because its pretty, but the idea that it is useless is an archaic concept that while may have been true several centuries ago before electricity is simply ridiculous in the modern world.

Posted by Alex20 | Report as abusive