A hedge against heating oil

Slowly but surely, many people are starting to realize how much less their paper money buys these days and how much higher the price of oil and gold have risen. Readers of the Wall Street Journal see it nearly every week:
(Someone really ought to have a contest to guess the year-end price of these two important commodities - it could be fun.)

Readers of the NY Times got yet another look at the past and future phenomenon that is private ownership of gold bullion in this article yesterday where one buyer figured she would "hedge against heating oil" this winter.

At Lexington Coin, a shop in affluent Lexington, Mass., the number of customers seeking to do business in gold coins spiked, the owner, Eric Carlson, said. Some customers were there to lock in profits, selling bullion coins containing an ounce of gold that they had bought five years earlier when gold traded under $350. Some were selling just one coin, telling Mr. Carlson they needed money to pay property taxes or car repair bills.
And some were buying, saying that they thought gold’s price would continue to climb. “The ones purchasing 10 coins at a time told me they were taking the money out of stocks and bank accounts,” Mr. Carlson said. “A woman buying three American Eagles told me she was buying them as a hedge against the price of her home heating oil shooting up this winter.”

Gold has a long history of waxing and waning in allure. At the moment, it holds a particular attraction, given Americans’ worries about inflation, the risks in the financial market and the falling value of the dollar.

“People understand gold’s intrinsic value,” said Katherine M. Porter, an associate professor of law and a bankruptcy specialist at the University of Iowa. “But because it’s beautiful and they can hold it in their hands, they may not perceive how volatile, like all traded commodities, gold is.”

Naturally, they interviewed an economist and he thought the whole idea of owning gold coins to be rather dimwitted:

James K. Galbraith, an economist and public policy professor at the University of Texas, however, cautioned that investors who are considering a gold purchase now, either to hold or trade, should “be prepared to take a bath.” They should know, he said, what happened to those who waited in long lines outside shops on Jan. 21, 1980, eager to pay more than $900 apiece for coins containing an ounce of gold.

While gold is a hot commodity now, the demand by average investors is still far from what it was then. That was the top of the previous gold bull market, which had begun in January 1975, after President Gerald R. Ford signed a bill legalizing private ownership of gold coins, bars and certificates.

Dimwitted economists have been saying that owning gold is a bad idea at $400, $500, $600, $700 and now $800. They'll probably keep saying it until it is true again - that day however is still years away.

ooo

This week's cartoon from The Economist:

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