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Gold rush continues

Stock market declines while gold is up 286 percent-will it hold?

Ashby M. Foote III / • Clarion-Ledger guest columnist • January 10, 2010

Have the hucksters and gold bugs got it right this time?

Turn on a radio, TV or Internet browser and you'll find some offbeat character like G. Gordon Liddy hawking gold through 800 numbers and Web sites. And who can blame folks for listening after the drubbing the stock market has treated them to this past decade?

Over the last 10 years the blue chip Standard & Poors 500 Index is off 23 percent while gold is up 286 percent. But it is not just the hucksters who see value in this ancient, precious metal.

Some of the craftiest of the ultra-clever hedge funds have been buying great gobs of gold - so much, in fact, that Manhattan banks had to expand their vaults in 2009 to store the burgeoning bonanza of bars and coins.

And behind the "smart money" hedgies are even deeper pockets making big gold buys. In the past two months, the governments of Sri Lanka and India have purchased 10 tons and 200 tons of gold respectively.

There is even mention of "peak" gold, terminology borrowed from the running-out-of-oil pitch of two years ago. Hogwash!

Gold is an element from the Periodic Table and, thus, while used, it doesn't get used up; therefore, we can't run out of it.

Some basics on gold: All the gold that has been mined through history (estimated as 170,000 metric tons) is still around, with a small percentage resting on ocean floors in sunken ships. Annual worldwide production averages 2,450 metric tons, which means world supply increases about 1.5 percent year-in and year-out.

So 170,000 tons times 32,150 ounces per ton, times $1,120 per ounce computes to a $6.126 trillion value for the world's above-ground gold supply.

Two other qualities make gold unique. Unlike metals such as copper, zinc and aluminum it has little industrial use.

This lack of industrial use is a key reason gold is considered unconventional by many professional investors and also a factor in making its valuation perplexing. When oil trades to $160 a barrel, it forces adjustments to reduce demand or innovation to increase supply or meet energy needs from other source.

But when gold hits $1,200 an ounce, no one discusses what consumers will cut back on in order to afford their monthly gold purchases. Most important, though, is gold's place in history as the world's oldest, most recognized and respected form of money.

An anecdote reflecting that respect: Fort Knox is well known as the site of the world's safest and most impregnable storage facility and since 1937 it has been the location of the majority of America's gold reserves. On Dec. 22, 1941, two weeks after the U.S. entered World War II, a clandestine train escorted by the Secret Service and troops of the 13th Armored Division arrived at Fort Knox's bullion depository.

The top secret cargo, delivered for safekeeping alongside 20,000 tons of gold bars, included original copies of the Declaration of Independence and the U.S. Constitution.

They remained in the depository until their return to the nation's capitol in October 1944. The inextricable link between a secure and stable U.S. government and gold is deeply embedded in the American psyche and culture.

It is precisely these attributes that make gold important as an investment but even more important as a signal. So if gold is the signal, what is the message of $900, $1,000, $1,100 or $1,200 gold - all levels first breached in just the past two years? Here are some perspectives to contemplate.

To the bubble-ites, $1,200 gold is just the next bubble in a long bubble parade, doomed for bursting when the hot money moves elsewhere for the next momentum play.

To skeptics of big government solutions, $1,200 gold is a sure sign that transferring trillions of dollars in toxic debt from "too big to fail" financial institutions to the balance sheet of the Federal Reserve is just rearranging the deck chairs of America's Titanic debt crisis.

To the "gold is money" crowd, this golden spike to $1,200 represents disarray in U.S. monetary policy and the potential breakdown of the paper currency regime the world's trading system has operated under for 38 years. The events of August 1971 are instructive.

World currencies in 1971 operated under the Breton Woods Agreement and it linked the dollar to gold. Faced with burgeoning deficits from guns and butter (Vietnam and Great Society) spending and French demands to exchange its dollar holdings for gold at $41 an ounce,

President Richard Nixon took preemptive action and closed the gold window.

This ended the Breton Woods currency system that had been in place since 1944 and initiated the floating currency regime as we know it today.

The parallel between 1971 and today's guns, butter and bailout spending is sobering and the price of gold shows it. The future track of gold will be set not by bubbles and hucksters but rather by presses - those run by the U.S. Treasury and its Bureau of Engraving and Printing.

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