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Since gold
stopped being money, it's become 75% more valuable on average...
SO GOLD is
now at "fair value" says Bill Bonner, long-time gold bug and my former
boss/partner-in-crime at The
Daily Reckoning's London HQ.
No, he won't sell
yet...if ever...says Bill. But gold's huge under-pricing a decade ago has
clearly passed by. Value-hungry investors got their "reversion to the
mean", and in the form of 400% gains, too. What one ounce of gold bought
2,000 years ago – a good suit of clothes, in Bill's oft-repeated
example – it now matches, if not exceeds in price, here in late 2010.
From here, that
makes it a "speculation".
Never mind that,
around the birth of Christ, all clothes were hand-cut and sewn
locally...rather than glued together by the world's cheapest labor, four or eight
thousand miles away. A suitable outfit for visiting the coliseum or agora
would have been made-to-measure, too...and today's finest tailors, at least
in London or New
York, will ask much more than the $1240 you'd raise
by selling one ounce at current "spot gold" prices.
Never mind all
that. Because Bill's point is well made, again...
Gold was a
screaming buy at the start of last decade, sinking to its lowest price
– in real terms – since the early '70s, as the chart above shows
(courtesy of the World
Gold Council, and taken from Roy Jastram's incomparable study, The Golden Constant).
But "Nobody
cared! Nobody was interested," as a (very drunken) London
dealer cried at me late last year. "I'd email out jokes, porn-site
links, anything to get clients reading so I could repeat three simple words:
'Buy gold now!'
"But they
didn't care...I don't even know if they looked at the porn..."
Today, in
contrast, you can't move for anxious investors and bullish hedge funds piling
into gold. Or so the media coverage would make it seem. New
gold dealers – online and on Wall Street – are meantime
sprouting like fungus to catch the "retail dollar", and the story's
grown so old, it's even spawned its own calendar for financial hacks (the
summer lull, India's post-harvest festivals, quarterly
data from the mining-backed World Gold Council, the Sept-end of each year
of the Central
Bank Gold Agreement). Wherever you look, the only debate that counts
– "It must be a bubble, so when will it burst?" – rolls
on for what is now more than two years.
As for the dumb
lump of metal, yes – it continues to pull in new money, nudging its
purchasing power ever-closer to the big top of 1980. But look again at that
chart above. For while Roy
Jastram saw a "golden constant" in his two centuries of US data
(and four centuries of British gold prices), the shorter-term volatility is
striking. Not least since gold ceased being money 39 years ago, and became
mere trinkets and collectibles instead.
"In terms of
what gold will buy, it does not seem undervalued to us," Bill Bonner
writes. "As near as we can tell, gold is now fairly priced.
"[So] the
reward now is different. It is speculative...not inherent. We cannot expect
to make money by waiting for the metal to revert to the mean. It's already at
the mean."
But what is
gold's mean purchasing power – the "golden constant" of
Jastram's peerless research? By our reckoning here at BullionVault today, it
has risen sharply since the US
abandoned its last pretence of a gold standard and floated the Dollar in
August 1971. Compared with the first seven decades of the 20th century, in
fact, gold's real purchasing power has stood more than 75% higher on average.
Which seems odd. Because without being used as money – its only utility
beyond decoration – gold became only more valuable. So while its purchasing
power may have looked "constant" across long historical periods
from Roy Jastram's vantage of 1977 (and again to die-hard gold bugs 20 years
later), its utility had in fact changed.
Gold became more
useful as a way of storing purchasing power, even though it was no longer
money. Or rather, because it was no longer money, in an age where
"Every
morning, when you look in the mirror, I want you to think 'What am I going to
do today to increase the money supply?'..." as John Ehrlichman,
assistant to Richard Nixon, apparently told Fed governor Charles Pardee,
sometime in the early 1970s. Post-war economic policy
across the West was haunted
by the Great Depression, and thus flowed from the fear that, unless money
was losing value, then spending and particularly investment growth would
grind to a halt.
Without the spur
of inflation, capital would choose to sit tight – in purses, pockets
and deposit accounts – because its purchasing power today would be
retained tomorrow. Savers could thus spend (or not) as they chose, rather
than being forced to exchange or grow their money to realize or maintain its
present value. Devaluing their money, in contrast, via persistent (and
obvious) inflation would force savers into the stores and stock-broker's
office. And thus today's targets for persistent (and obvious) inflation were
born.
"[Harvard
professor] Kenneth Rogoff is proposing that the United States use a burst of inflation to get out of
its slump," writes Princeton professor
Paul Krugman. "I agree...[but] if central banks can gain any leverage at
all, it’s only by credibly committing to inflation over a fairly
sustained period...[not Rogoff's] two or three years of slightly elevated
inflation."
Bill Bonner's
bang on the money, in short. Gold from here is a speculation, but a
speculation only on academics getting their inside man (whether Mervyn King
in London or Ben Bernanke in Washington) to apply their latest hare-brained
scheme – massive new money inflation.
What price gold's
utility as a store of real value if...when...they succeed?
Adrian
Ash
Head of Research
Bullionvault.com
You can also Receive
your first gram of Gold free by opening an account with Bullion Vault : Click
here.
City correspondent
for The Daily Reckoning in London, Adrian Ash is head of research at BullionVault.com –
giving you direct access to investment gold, vaulted in Zurich, on $3 spreads
and 0.8% dealing fees.
Please Note: This
article is to inform your thinking, not lead it. Only you can decide the best
place for your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on
it.
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