40 years on from gold standard, bugs crow

LONDON Thu Aug 11, 2011 10:22am EDT

One-tael gold cubes (1.13 ounces or 38 grams) are seen at a jewellery store in Hong Kong in this August 11, 2011 illustration photo. REUTERS/Bobby Yip

One-tael gold cubes (1.13 ounces or 38 grams) are seen at a jewellery store in Hong Kong in this August 11, 2011 illustration photo.

Credit: Reuters/Bobby Yip

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LONDON (Reuters) - Gold, and only gold, will be our salvation when the value of companies, banks, countries and even money itself melts away. Gold, not shifting currencies, is the foundation of wealth and security. Gold is back, for good.

This is the song of the "gold bugs" - the fervent fans of the precious metal who have clung to its investment value for three generations and now glow in the reflected luster of a record price approaching $2,000 for just one ounce.

Monday will mark the 40th anniversary of the United States' abandonment of the gold standard. But gold bugs kept the faith -- even when prices stayed under $500 for nearly 25 years after their 1981 peak.

Their passion derided, dismissed as hopelessly out dated doomsayers, their love for the metal seemed irrational.

The gold bug label itself goes back to master of the supernatural Edgar Allen Poe and his story of that name, a tale of golden beetle whose bite sends the hero to a chest of gold and jewels.

It reappeared as one of the first campaign buttons -- a brass bug sported by supporters of William McKinley in the bitter U.S. presidential election of 1896.

McKinley, the first presidential candidate to barnstorm across the nation, backed the gold standard against his Democratic opponent's proposal that it should be joined by silver in a fixed ratio. Loser William Bryan slipped into history but bimetallism lived on for a little in the think tanks of the day.

Fast forward and the financial crisis of 2008 has made gold the darling of investors from hedge funds to taxi drivers, and sparked a near-doubling of prices.

"Gold has been rising against all national currencies, and that's significant," James Turk, founder of bullion dealer Goldmoney, said.

"When there are problems with a national currency... people begin to worry about the value of their money, whether they're going to lose purchasing power because of inflation or other problems. As a consequence, they look for safe havens."

He was speaking as a true gold bug -- not in the dark days after Lehman Brothers' demise in 2008, nor in the depths of last year's euro zone debt crisis, nor after Standard & Poor's recent downgrade of the United States' top-notch credit rating.

Turk's view came in a BusinessWeek interview he gave in 2005, well in advance of the current financial crisis.

"My long-standing forecast, made in a Barron's interview in October 2003, is that $8,000 per ounce will be reached sometime between 2013-2015," he told Reuters this week.

"I've stayed with that forecast over the years and see no reason to change it."

The world's current financial woes are only going to get worse if current policies continue, he believes, meaning the rally in gold prices is unlikely to stop here.

"Politicians and central bankers are making decisions that debase national currencies, and the resulting bad monetary policies they are following are causing the gold price to rise," he said.

Gold's latest push to record highs has gone hand-in-hand with a plunge in Wall Street stocks to their lowest in nearly a year, while the dollar is languishing near multi-year lows.

Long-term gold bull David Beahm, vice president of marketing and economic research at New Orleans bullion dealer Blanchard and Co., says worries over the stability of the stock markets will be a key driver of higher gold prices.

"The best investment right now is gold," he said. "By diversifying one's portfolio with a negatively-correlated gold, investors can protect themselves from deep plunges in the equity market."

"There is no news in the market today or over the coming few months that is likely to stop the current gold bull market, as the fundamentals are firmly in place for gold to continue its rise," he says.

Traditional investment commentators have dismissed gold -- which, with no "intrinsic" value of its own, is only really as valuable as a buyer thinks it is -- as a classic bubble.

But those who have predicted its crash since it rose above $700 an ounce in 2006, on a simple "what goes up, must come down" analysis, have consistently been proved short-sighted.

Gold prices traded in a relatively narrow range from $250-420 an ounce for the whole of the 1990s. They have since more than quadrupled from that high, peaking at a record just below $1,800 an ounce earlier this week.

Their rise accelerated sharply from 2005 onwards, breaking through $1,000 an ounce in 2008 as the weaker dollar fueled demand for alternative stores of value.

Now gold bulls are predicting that prices, now around $1,750 an ounce, but still short of an inflation-adjusted high of nearly $2,500 in 1980, could climb even higher.

"I believe the price of gold will rise irregularly over the next several years, possibly reaching $1,850 an ounce by the end of this year, breaking above $2,000 in 2012, and possibly $3,000, $4,000, and even $5,000 in years to come," says Jeffrey Nichols, managing director of American Precious Metals Advisors and senior economic advisor to Rosland Capital.

"At the heart of this forecast is my observation (or belief) that the United States and, to a lesser but still significant extent, Europe have been living beyond our means for decades."

Back in 1896, losing presidential candidate Bryan's Cross of Gold speech turned the watching crowd into "a wild, raging irresistible mob," the New York Times reported.

Gold bugs, often accused of sensationalism, are finding their passion is becoming mainstream. "Raging" is probably no longer a suitable description of them. "Irresistible" is increasingly nearer the mark.

(Reporting by Jan Harvey, editing by William Hardy and Richard Mably)

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Comments (6)
ChrisHerz wrote:
There are a lot of people in this market who do not know their economic history. All governments during Great Depression, version 1 nationalized gold — forbade its sale to anyone but the respective national treasuries at nominal prices.

Aug 11, 2011 1:53pm EDT  --  Report as abuse
BowMtnSpirit wrote:
I know this is an over-simplification, but really, this article keeps talking about the price of gold in dollars. Those of us who hold either the yellow or white metals know that the valuation is relative. The dollar has been devalued by the nation’s monetary policies. In that sense, you could look at it as gold having remained what it is, a commodity/asset/money of limited and known supply, and stable in value. But it takes you a whole lot more of those devalued dollars to buy an ounce.

To highlight this, all the talk has been about gold, while silver has been relegated to the sidelines over the past couple months. Even though silver has far more industrial use than gold, and certain quantities are destroyed or tied up in production, gold has been given a push by the media. As a result, gold has really been over-valued relative to silver over the past month — or more accurately, silver has been over-sold/under-bought. Had you traded in silver for gold in late April, you could have obtained one ounce of gold for 32 oz. silver. Two days ago, you would have had to pay 46 ounces of silver.

The gold-silver ratio has been trending downward for the past 20 years, since it topped out at ~100 oz. silver for 1 oz. gold. I’ll trade between those metals on the ratio dips & peaks. But as to either metal though, I am NOT trading them for dollars. Maybe bread though. That has remained a relatively stable ratio of ~350 loaves per oz. since 600 BCE.

Aug 11, 2011 2:36pm EDT  --  Report as abuse
stanrich wrote:
What we need is some kind of a return to a precious metals standard, whether it be gold, silver, platinum, palladium, or a basket of many different kinds.
If governments were required to hold a ratio of precious metals to the amount of currency in circulation, AND, on demand, redeem that currency in the precious metal of the redeemer’s choice, a whole lot of the kind of financial problems we see today would go away.

Unfortunately, since this would mean the end of a lot of those complex financial instruments we see traded on Wall Street, this will happen when pigs fly…

Aug 11, 2011 8:21pm EDT  --  Report as abuse
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