How long will the gold rush last?

Marketplace Staff Nov 20, 2009
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How long will the gold rush last?

Marketplace Staff Nov 20, 2009
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TESS VIGELAND: It’s been a century and a half since Forty Niners flooded into California, sparking the biggest gold rush in modern history. There ain’t no more gold in them hills, just a multi-gazillion-dollar deficit. But a new gold rush is on. The shiny stuff is setting records almost daily; now selling for more than $1,100 an ounce.

Our economics editor Chris Farrell worries that sounds awfully familiar.


Chris Farrell: You know you’re in a bubble when your favorite commercial rock station is running ads for businesses offering to pay cash for jewelry.

Investors are pouring money into exchange-traded funds. More mutual funds are adding gold to their portfolios. Pension fund managers are quoted in news stories calling the precious metal an “asset class.” Forecasts of gold’s price peak keep going up and up. The highest I’ve seen is $5,000 an ounce.

Skeptics are scorned. The head of the World Gold Council recently told the Financial Times, “There is no doubt that we have entered a new era for gold.”

Hmmm. That reminds me of the warning by Sir John Templeton, a legendary investor. He quipped that the four most dangerous words in the English language are “This time is different.”

The growing legion of gold fans don’t buy the “gold is a bubble” bubble argument, of course. They point out that there are reasons behind the price gain. But that’s in the nature of bubbles.

What factors do the gold bulls trumpet? For one thing, gold is an ancient store of value during crisis. Currencies may go poof, but you can always sell gold. Another reason, investors fear a surge in inflation. And gold is a traditional hedge against rising prices. Governments around the world — especially the U.S. government — borrowed huge amounts to stimulate their economies and stave off financial collapse. Central banks ran their printing presses. It’s potentially an inflationary combination. Maybe.

But I still don’t buy it. Inflation remains subdued almost everywhere, including the U.S. Central banks are well aware of inflation dangers, and they all share a strong anti-inflation bias. The supply of gold is up too, thanks to higher prices.

Taken altogether, the recent price action in gold seems increasingly driven by market psychology. A speculative fever is sweeping the market and the growing herd of bettors is driving prices higher.

How long can the run last? No one rings a bell announcing when a boom has turned into a mania. Bubbles always run longer than skeptics imagine. That was true with housing and dot.com. All I can do is shake my head and say, “Caveat Emptor.”

Vigeland: Our economics editor — and gap-toothed prospector — Chris Farrell.

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