Wednesday, November 10, 2010

Gold: Economic Samsara

Whether it's wampum, dollars backed by debt or gold, it's all a product of the little-m mind.

The price of gold has been rising as anxious investors cast what amounts to a throw-the-bums-out vote against, well, just about everything.
The weak dollar, the volatile stock market, the lackluster economy, the yawning budget deficit, the accommodative Federal Reserve — all this and more have people rushing for gold...

And while gold is the most obvious example of this trend, other commodities are rising, too. Wheat, copper and cotton all soared on Tuesday.
Nor is gold fever restricted to hedge fund managers wielding billions of dollars. Individual investors have also been clamoring to get in on the trade, scooping up gold coins like one-ounce American Eagles and South African Krugerrands.
“People are coming in to buy 50 or 100 coins at a time, which is pretty hefty for individuals,” said Mark Oliari, chief executive of CNT Inc., a Massachusetts coin broker. “It’s not just rich people, either. A lot of people are putting 30 to 35 percent of their net worth in gold; they are scared to put money in paper assets.”
Signs of gold’s renewed appeal have been building for months, as well-known Wall Street figures like George Soros and John Paulson piled into the metal. JPMorgan Chase even reopened a long-closed vault below the streets of downtown Manhattan to meet investor demand to store the stuff...

Since the depths of the financial crisis two years ago, gold has risen 91 percent, and it is nearly a third higher than just one year ago, according to Janney Montgomery Scott [which is an investment firm].

While gold has touched new records in nominal terms, when adjusted for inflation the price remains 40 percent below its real record high, which was reached in 1980. What is surprising economists is not the rise of gold prices, but the speed of its ascent.
As a result, even longtime gold investors, like [Abhay Deshpande, a portfolio manager with First Eagle Funds], worry that the current rally might be overdone. “It’s beginning to smell a little like the beginning stages of a bubble,” he said. “Either inflation has to pick up or currencies have to plunge to justify a continuing rise.”
Armageddon is very fashionable in the United States these days.  A great deal of faith-based folks are going to get burned by this.  Full disclosure: I own some of the ETFs related to this mania, but they are by no means the entirety of my nest egg.  But I've seen these ridiculous price-rises myself, and it is yet another bubble.  Like anything else, too much of their being burned will have been the result of actually believing the stuff that appears in their minds as a result of other stuff appearing in other people's minds, and those other people telling the first group of people what to do.

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