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The Economist: Thar’s Gold in Them Thar Hills!!!

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The author of this entry is responsible for this content, which is not edited by the Wilson County News or
Dr. M. Ray Perryman
March 25, 2011 | 2,226 views | 1 comment

For thousands of years, gold has been more than just another metal. It has been worshiped and hoarded. Voyages have been launched to find it, countries settled to mine it, and wars waged to steal it. Gold has been used to cover sarcophagi, crown kings, and award Olympians. Clearly, this is no ordinary commodity. It was also one of the earliest commodities that societies stumbled onto to serve as coin of the realm.

The price of gold has recently hit historic levels, and the bull market for gold we are now experiencing is the longest one recorded thus far. I am frequently asked why the price of gold is so high and whether I expect it to stay that way. While I am no investment advisor, I can point to several economic trends that have been working to push up prices.

Gold’s use as a medium of exchange began as early as 1500 BC, and modern currencies have used it as a standard of value. In 1792, the Coinage Act first linked the US dollar to gold. In 1900, the Gold Standard Act committed the US to a fixed rate of exchange between dollars and gold; other countries passed similar standards. These were temporarily suspended during World War I, and the federal government acted to control gold mines and monetary gold during the Great Depression.

In 1944, the Bretton Woods agreement again set par values for dollars (as well as other currencies) in terms of gold. After several acts to devalue the dollar (by raising the number of dollars required to purchase an ounce of gold), the dollar was allowed to float freely beginning in 1973. It was no longer a currency equivalent, but its mystique is deep-seated and results in values that often far exceed its practical or commercial usefulness.

From a level just over $42 per fine troy ounce in early 1973, the price of gold moved rapidly (though not always smoothly) upward, reaching a high of $870 in early 1980. Shortly thereafter, downward movement began, and it was only recently that gold again reached the past peak. Over the past year, prices have been rising rapidly, up almost 29% to fluctuate in the $1400-$1450 range. That’s up from $268 a decade prior.

The price of gold reflects not only the traditional forces of supply and demand, but also normally embodies anticipated changes in the underlying value of currency. For example, as inflation erodes the value of the dollar, the price of gold (expressed in dollars) rises; it takes more dollars to buy a quantity of gold. Looking at long-term price patterns of gold expressed in various currencies provides a snapshot of certain aspects of economic performance.

When investors expect inflation, they tend to buy gold as a ‘safe haven’ from the devaluation of currency. It can be easily resold as needed for cash at a later date (and at a higher price if there is, in fact, inflation). Similarly, uncertainty due to conditions such as global conflicts can lead to a desire to hold gold, since it’s also one of the few assets that can be sold virtually anywhere in the world.

Given the huge and mounting federal deficit and debt problem, many market watchers fear inflation in the years to come. Without action to curtail spiraling debts, they caution, the US will be forced to inject dollars into the system, thus sparking inflation. Moreover, a substantial surge in the domestic and foreign money supply occurred during the darkest days of the recent financial crisis and recession. While essential, these measures have the potential to drive long-term inflation. Gold, therefore, represents one potential strategy to insulate against rising prices.

However, some pundits believe that the long run-up in gold prices is beginning to level off and may soon turn to the negative. Under this line of thought, inflation fears subside thanks to Federal Reserve actions to curtail price pressures by raising interest rates and/or pulling back some of the recent monetary expansion. Such policies would lessen the desire for gold as a hedge against inflation while simultaneously working to increase the attractiveness of other safe investments such as Treasury securities. Moreover, in modern markets, to the extent the expectations of future price increases are already built into the price, the potential for a hedge has already been removed.

Whether gold will maintain today’s historic price levels remains to be seen. Inflationary fears and uncertainty will work to keep the value up. However, the price of gold can drop precipitously and remain relatively low for decades.
From Alexander the Great’s military campaigns to Marco Polo’s travels to the Far East, the portable wealth represented by the metal has served as an impetus to action. The pursuit of gold has literally changed the course of history; its role is diminished now, but its powerful hold on investor emotions shows no signs of abating.

Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group ( He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.
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The Marcelina Muse  
Dry Tank, TX  
March 27, 2011 11:35am
Hmmmm. The Fed raising interest rates and pulling back on monetary expansion. We are talking about our Fed, here in the US right? Or is there is another Fed with a leader who would really do that? Almost certainly the head of ... More ›

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