On Monday, S&P made U.S. debt more risky to hold by changing the long term outlook from “stable” to “negative.” Oddly, no one in the bond markets seemed to notice. Oh Tuesday the paranoia kicked in for the goldbugs. Now that gold has hit a record $1,500 per ounce, I’m not sure who’s more excited, the hucksters shilling gold as a can’t lose inflation/global conflagration play; or burglars, who now have added incentive to break into your house.
First, remember that this new record is nominal pricing. Gold would have to reach something like $2,360 to match the inflation-adjusted top of $850 set in 1980. Second, gold reached its peak in 1980 when inflation was raging and there was great handwringing over our exploding national debt. The U.S. was facing ruin, we were bankrupting our children. Unemployment was high and young people were opening wondering if they would ever have the opportunities their parents got. Does some of this sound familiar? (No, we don’t have an inflation problem, just the fear of one.)
So then what happened? The Fed killed off inflation (thanks Paul Volker); we were not swamped by debt. Life got better. It does that. And gold then went on a 20-year trip south, reaching about $272 at the beginning of 2000. For two decades gold made penny stocks look like investment grade bonds. Stocks were the thing.
Until they weren’t. Had you loaded up on gold at the beginning of the decade you would have done far better than stock investors. Gold is up some 450% since then, which is hardly a bad return. But the question being asked now after this decade-long move, How Far is Up? The worst thing that could happen to goldbugs right now is that peace breaks out in the Middle East, the economy continues to rebound and Congress agrees to a plan to deal with our $14 trillion debt. You know they are giggling as they ask themselves: What are the odds of that happening? In the meantime, make sure your gold jewelry is in a secure place.