After the Gold Rush

I was lying in a burned out basement
With the full moon in my eyes.
I was hoping for replacement
When the sun burst through the sky.

Clearly Neil Young was not thinking about investing in gold when he wrote these lyrics. The next line goes,

There was a band playing in my head
And I felt like getting high

But his words are no less fitting for a time when financial markets are at best volatile, and at worst going down the proverbial shitter and commodities such as gold are a last vestige of hope for the speculator.

We are in the midst of a modern day gold rush. Obviously, no one is fleeing to Northern California and setting off into the wilderness panning streams for gold nuggets. You don't even have to purchase actual gold these days to participate in the gold rush. There are a handful of derivatives and futures trading markets to enable us to never have to wield a pick axe or climb down a mine. You can even buy gold on the U.S. stock market (ticker symbol - GLD). But the profits to be made are no less significant. In January 1980, gold hit the record price of $850 and ounce. It again hit that price again 28 years later in January 2008. It has continued to sore and reached over $1,000 and ounce in March 2008, before just last week falling below the $1,000 mark. You may think this is crazy and due for a crash.

But consider the evidence to the contrary. As James Turk blogged on goldprice.org, the inflation adjusted price for $850 of gold in 1980 is $6,255 in 2008 prices! Just let that one sink in for a minute...

Now you can understand why everyone, including myself, is investing in gold. Gold hitting $1,000 is rather miniscule to the potential price it could garner. But this begs the question, why is the price of gold rising so rapidly? There are several answers to this question. The demand for gold based jewelry in emerging markets is skyrocketing. You can hardly find a man Moscow that doesn't have several ounces, or kilos, hanging around his neck. According to the World Gold Council, the people who keep track of this stuff, gold demand in 2007 rose 37% from the previous year. Supply is decreasing at the same time. South Africa, which only 40 years ago produced about 80% of the world's gold, only produces 11% now.

But the real reason for surging gold prices is the floundering of the American economy. Gold prices are denominated in dollars so as the dollar continually loses value, the price of gold has to go up because it takes more dollars to buy the same amount of gold. This is essentially true of other precious metals, oil, and to a certain extent agricultural commodities such as wheat. As U.S. financial markets continue to have liquidity problems and the Fed keeps cutting interest rates, the dollar's prospects continue to look grim. The only movement in the near future is down or sideways, so the only way for gold to go is up up up! Unless of course, the world decides to denominate gold in another currency. In which case, I am screwed. The ironic part about all of this is that as I, or any other American, invests in gold, we are essentially betting against the American economy, or at least against the dollar. Seems like a pretty smart bet at this point.

So grab a pan, or an Etrade account, and git yerself some gold. More demand will drive the prices higher even still.

What does this have to do with DC? I first starting investigating gold when I was working at The Globalist. As with most things I did there, I did the research and wrote the column and it sat around in a pile of paper for several months. I don't think it has been published yet, 9 months later. The incompetency of the editor-in-cheif, Stephan Richter, is in the end, my gain.

As Neil Young later sings,

I was thinking about what a Friend had said
I was hoping it was a lie.