Gold Bug

The price of gold hit $1,900 per ounce yesterday ... the highest in history.  And many ads on current cable TV and talk radio focus on selling this metal to gullible consumers.  I say "gullible" despite the fact that many who bought this yellow metal last year have cleaned up.  But those speculating on gold must note that the buyer's price and the seller's price can often differ by as much as 20% and the only possible gain from gold is a capital gain, no interest or dividends ... plus there are often selling and buying commissions and margin fees ... plus, if one buys in quantity, there are hefty shipping or storage fees.  And don't forget that old adage: "you can't eat gold."

This all aside, gold has had a remarkable run ... I bought some for my grandson when he was born five years ago at about $550 per ounce ... it is higher now by more than a triple ... quite a run.  The question then present themselves: Why such a run?  And, how high might gold go?

The answer to the first question has a lot to do with the decline of the U.S. dollar.  Obviously, the price of gold in euros or in yen has not had such incredible price inflation.  Also, worldwide political and economic uncertainty causes many to seek a safe haven for one's assets.  The U.S. dollar had been such a haven in the past, but this is rapidly changing due to irresponsible fiscal policies in the U.S. over the last ten years.  Thus, gold moves to the fore for nervous investors.  But some pundits believe that this may be a dangerous strategy currently ... see: Danger in Gold

The second question is a lot more difficult to answer.  It mostly depends if one believes that the U.S. will listen to Ron Paul (and others) and return to the gold standard ... and what one believes will happen to world inflation rates over time.   To see if a U.S. return to the gold standard is viable, one has to inspect the level of its gold holdings relative to its supply of currency in circulation, see:  World's Gold Reserves and Money Supply Statistics A number of years ago I remember hearing that the total amount of gold in the world would only fill a small barn.  I suspect that, today, it would fill a big barn (with a very strong floor).  The slide show referenced says that there are currently 30,160 tons of gold in the world ... of which the United States owns 8,965.6 tons (29.7%). At $1,900 per ounce, these U.S. holdings would be worth about $598 billion while the amount of U.S. currency in circulation is $974.8 billion.  This suggests that, to justify a return to the gold standard at parity would require that the price of gold to rise by at least 79% ... to about $3,400 per ounce ... just to back the existing currency in circulation.  Backing the entire M1 money supply (including demand deposits), but probably not needed, would require our gold to price-inflate to about $6,375.

Do I think that this is going to happen?  No.  First, I don't think Ron Paul will be elected President and I don't think that we will return to the gold standard ... Fort Know would be emptied in a trice.  And I am always skeptical of listening to and acting on sleezy TV and radio ads.  But it sure seems that the current rate of inflation in the price of gold seems to be trying to get us there.