The Gold/Greenspan Convergence

There's a nice article about gold by Tom Petruno in this morning's L.A. Times.

This is the first we've heard the phrase "Gold/Greenspan Convergence". With all the talk about new 18 year highs for gold and the end of Fed Chairman Alan Greenspan's 18 year term coming near, we are disappointed in ourselves for not coming up with it first.

Nice work Tom!

This is a very well-reasoned story that includes a brief, yet seemingly still obligatory segment about "gold bugs as tin-foil hat wearing lunatics", this time making reference to survivalists and shotguns. In what is surely a sign of things to come, the article goes on to do a fine job of debunking this perception of gold, casting the yellow metal in a much more serious light, citing trends in recent mutual fund investment flows.

Look for more articles like this in the future, as more and more people look at gold in a much different way, given current world events. Here are some excerpts:

The last time an ounce of gold cost $470, Alan Greenspan was in his first year as chairman of the Federal Reserve.

Seventeen years later, Greenspan is on the verge of retiring — and the metal finally is back to its late-1980s price level, after a long, long bear market.

The gold/Greenspan convergence is raising suspicions on Wall Street. Some believe the metal's revival must be saying something about the economy the Fed chief is leaving to his as-yet unnamed successor.

On calamities and shotguns:

Indeed, any kind of economic calamity that would make people question the viability of national currencies, particularly the dollar, would most likely be great for gold, at least initially.

To go too far down that road, however, is to enter the realm of the survivalists and others who believe the end of the world as we know it is imminent. If that day were to come, let's face it, you'd probably be smarter to own shotguns than gold bullion.

Jim Melcher, president of money management firm Balestra Capital in New York, owns gold and is no fan of U.S. markets. But he also says he isn't planning for Armageddon.

Melcher views gold in the same light as foreign currencies and foreign stocks: a way to diversify against the risk that the U.S. is overstretched financially because of its massive trade and budget deficits and will increasingly struggle to compete with the rest of the world.

"This is no longer a country in a growth phase," he says. "You've got to invest where there's growth."

That's harsh, and many trillions of dollars of investment in the U.S. say Melcher's wrong.

Even so, consider what the average U.S. mutual fund investor has been doing: Americans invested nearly twice as much in foreign stock funds in the first half of this year as in domestic stock funds, according to the Investment Company Institute.

On portfolio diversification:

There may be an undercurrent of fear in investors' gold purchases, but it may be less a fear of catastrophe than a recognition that the global economic and market landscapes are changing, and the outcome is uncertain.

The metal was a terrible investment in the 1990s as inflation dwindled and financial assets roared. Now, there are enough questions about inflation and the outlook for financial assets to at least make gold a contender as investors think about how to divide their portfolio pie.