An alternative view of the rising gold price

Here's a commentary about the recently rising gold price that sounds a bit more credible on Friday than on Wednesday, but, after taking it all in, it still sounds pretty naive to me.

Gold Buyers Nip at Ultimate Emotional Experience: David Pauly

Why is it no matter how much the world advances intellectually and technologically, people keep speculating on gold?

John Neff, who managed Vanguard Group’s Windsor Fund for three decades, once offered this take on the precious metal: “It’s not an investment, it’s an emotional experience.”

Emotions have been running high. Spot gold prices have risen 44 percent in the past 12 months. Gold futures reached a record $1,196.80 an ounce in New York last week before closing at $1,175.50 on Nov. 27.

Why do people speculate on gold (apparently you can't just buy or invest in the stuff)?

Because governments own the printing presses and the currency isn't backed by anything other than faith in governments to act responsibly.

For many people, it's as simple as that.

The fact that the metal keeps going up in price now that we've exited the late-1990s nirvana of perpetually rising asset prices, fueled by credit creation and government money printing the likes of which the planet has never seen before, shouldn't be all that surprising.

It's an interesting read to get a better understanding of how some still view precious metals today in a world that is maybe a little less intellectually and technologically advanced than they think it is.

Naturally, readers are reminded that gold pays no interest or dividends - kind of like savings accounts these days - and he wonders why the U.S. doesn't just sell it's useless stash.

Gold has to keep rising if current buyers are to get any return. Direct investments in gold pay no interest. Some folks buy gold-mining stocks that pay dividends, but those are subject to declines in the companies’ other mining businesses.

People are speculating in gold because the dollar has been falling and they think gold will hold its value. Others buy gold out of fear the money created as the U.S. props up its banking system will lead to inflation. Others want the metal simply because it’s increasing in value.

Gold’s latest boom offers the U.S. government an opportunity to capitalize on the emotions of speculators and sell off its own horde of the metal.

At today’s prices, the Federal Reserve holds about $300 billion in gold. The Fed’s balance sheet values the holding at just $11 billion, but this is based on a price of about $42 a troy ounce, the so-called official U.S. government price established in 1973.

Something Useful

In these times of trillion-dollar budget deficits, $300 billion may not seem like much. Still, that money could pay some of the costs of any health-care bill that comes out of Congress. Or it could help pay for wars in Iraq and Afghanistan.

The U.S. probably would have to sell its gold a bit at a time so it didn’t cause a slump in prices, partially defeating the purpose of the exercise. U.S. holdings account for 27 percent of the gold held as reserves by central banks.

On second thought, speculators are so hungry for gold, selling by the U.S. may not scare them.

The government, of course, seems content to let its gold investment lay in storage. Some economists would be shocked at the idea of getting rid of the country’s stockpile, which they see as backing for the dollar. Do they think China and Japan buy hundreds of billions of dollar-denominated Treasury securities because America owns some gold? They buy because they’re sure the U.S.’s credit is good.

Trade Tool

Gold long ago was used by nations to balance their trade books. When the U.S. bought more abroad than it sold, it paid the difference in gold.

It’s comical to think of that today. Once the U.S. economy gurgles again, the Fed’s $300 billion in gold would only cover about six months of the nation’s trade deficit.

European and Asian companies don’t collect dollars for their goods because they expect a payoff in gold but because they think the currency has its own value.

Neff, 78, still manages money for himself and his family in suburban Philadelphia. “I’m still in the hunt,” he says.

The hunt has never taken the veteran investor anywhere near gold. While the experience has been exhilarating lately, “I’m not attracted to it,” Neff says.

If only others were so sensible.

What's really comical today is to consider how dangerous global imbalances have become in a world full of paper money and pegged exchange rates where these imbalances can just continue to grow and grow until something really, really bad happens.

Of course, lately, nations with floating exchange rates just seem to blow up after a while.