Why are gold prices stagnant?

Commentary about business and finance.
Aug. 13 2002 10:29 AM

Fool's Gold

The economy's in chaos. The world's a mess. So why are gold prices stagnant?

Stocks have swooned, the recovery is in doubt, another CEO is indicted every day, Argentina is in default, the Middle East is in turmoil, and the Bush administration is threatening to invade Iraq. This, in short, is the disastrous moment "gold bugs" have been eagerly awaiting. Now is the time that gold—solid, immutable, real—should be rocketing toward $800 per ounce, yet the yellow metal has confounded its long-suffering devotees by remaining tethered to the $300-per-ounce level, where it has been stuck for years. Either things are not as bad as they seem, or gold may finally be losing its ancient status as the investment of last resort.

Advertisement

"About time," mutters the ghost of John Maynard Keynes, who long ago pronounced gold "a barbarous relic." Keynes was right, of course, but relics often fetch high auction prices, and gold famously soared to $850 an ounce in the malaise-ridden days of January 1980. Since then, however, it's been mostly downhill. When stocks plunged precipitously in 1987, gold shot back up toward $500, but before long it resumed its steady spiral. Even last year's 9/11 terrorist attacks barely registered on the gold scale. After averaging $272 per ounce during August 2001, gold moved up to $293 after the attacks, then fell back again.

This year, while equities fell and the dollar declined against the euro, gold made a move, hitting $330 on June 4. But then, even before stocks began their recent recovery, the gold rally ran out of gas. The metal this week is trading around $315, while gold-mining executives talk hopefully of a climb up to $350 over the next year: a nice gain if it pans out, but hardly the stuff that dreams are made of.

Gold is supposed to be the ultimate hedge against financial disaster. As such, it tends to attract investors from the paranoid fringe, the sort who invested heavily in canned goods and bottled water before Y2K and who keep a few Krugerrands buried in the backyard to be bartered for food when the world goes to hell and "fiat money" becomes worthless. This doomsday cult aside, gold is the realm of the hardheaded pessimist, who studies the many ominous portents currently on display and concludes, not unreasonably, that things may get a lot worse before they get better. Many people are very nervous these days—yet gold thus far has failed to take off into the stratosphere. What gives?

A comforting answer would be that the long and painful decoupling process finally is complete, and the link between gold and money is now severed. Three decades have passed now since Richard Nixon ("We're all Keynesians now") ended the dollar's convertibility to gold. The world's financial system now rests on a universal confidence that theoretical money stored in computers is as real as physical money stored in underground vaults.

But if you think gold is completely obsolete, then take a visit to the U.S. Federal Reserve Bank of New York, where tourists can visit the vaults and ogle the tons of gold bars on deposit there from the world's central banks. No tourists are allowed into Kentucky's Fort Knox, but the U.S. Bullion Depository still maintains its facility there, the legendary pile of ingots that has fired the imaginations of so many movie villains. Congress could sell off the bullion and pay down the federal deficit, but no such move is contemplated. Gold still backs the dollar, if only implicitly.

So gold is indeed a relic, the idol of a half-forgotten religion—but the world, like a superstitious atheist, is not quite ready to let go of the faith it no longer professes. If gold prices are stable despite the various crises now wracking the globe, it may just be that current conditions are not scary enough to touch off a true panic. That's reassuring, but it leaves open the question of what will happen if the world financial system ever really melts down. If things fall apart on an epic, 1930s scale, $800 may yet seem cheap for an ounce of gold, and those survivalists can dig up their Krugerrands and laugh all the way to the bank—which of course will be closed, rendering their triumph moot.

That's the problem with gold as a long-term investment. The circumstances under which such a bet would pay off would be so dire that you wouldn't want to win it. Which is why many nervous investors currently cowering on the sidelines are doing so in cash rather than gold, even though "cash" these days is only a computer entry created by the keystrokes of unseen gnomes. Investors can't see this money or touch it, but they can duck into any ATM and call it up for inspection and walk away with a receipt confirming its continued existence. And when they get their nerve up again, they will put it back into stocks and bonds, which likely will gain far more value over the years than a bar of gold locked up in a vault.

TODAY IN SLATE

History

The Self-Made Man

The story of America’s most pliable, pernicious, irrepressible myth.

Michigan’s Tradition of Football “Toughness” Needs to Go—Starting With Coach Hoke

Does Your Child Have “Sluggish Cognitive Tempo”? Or Is That Just a Disorder Made Up to Scare You?

The First Case of Ebola in America Has Been Diagnosed in Dallas

Windows 8 Was So Bad That Microsoft Will Skip Straight to Windows 10

Politics

Mad About Modi


Why the controversial Indian prime minister drew 19,000 cheering fans to Madison Square Garden.


Building a Better Workplace

You Deserve a Pre-cation

The smartest job perk you’ve never heard of.

Don’t Panic! The U.S. Already Stops Ebola and Similar Diseases From Spreading. Here’s How.

Parents, Get Your Teenage Daughters the IUD

The XX Factor
Sept. 30 2014 12:34 PM Parents, Get Your Teenage Daughters the IUD
  News & Politics
Politics
Sept. 30 2014 9:33 PM Political Theater With a Purpose Darrell Issa’s public shaming of the head of the Secret Service was congressional grandstanding at its best.
  Business
Moneybox
Sept. 30 2014 7:02 PM At Long Last, eBay Sets PayPal Free
  Life
Gaming
Sept. 30 2014 7:35 PM Who Owns Scrabble’s Word List? Hasbro says the list of playable words belongs to the company. Players beg to differ.
  Double X
The XX Factor
Sept. 30 2014 12:34 PM Parents, Get Your Teenage Daughters the IUD
  Slate Plus
Behind the Scenes
Sept. 30 2014 3:21 PM Meet Jordan Weissmann Five questions with Slate’s senior business and economics correspondent.
  Arts
Brow Beat
Sept. 30 2014 8:54 PM Bette Davis Talks Gender Roles in a Delightful, Animated Interview From 1963
  Technology
Future Tense
Sept. 30 2014 7:00 PM There’s Going to Be a Live-Action Tetris Movie for Some Reason
  Health & Science
Medical Examiner
Sept. 30 2014 6:44 PM Ebola Was Already Here How the United States contains deadly hemorrhagic fevers.
  Sports
Sports Nut
Sept. 30 2014 5:54 PM Goodbye, Tough Guy It’s time for Michigan to fire its toughness-obsessed coach, Brady Hoke.