Gold: A Sucker's Bet
Gold, quite simply, is useless. The gold bubble could last for several more years. But, in time, it will come crashing down.
In a recent blogpost, David Frum noted that while gold prices keep falling, the airwaves are still full of ads encouraging people to keep buying gold. Frum’s predictions of a coming “gold bust” are right on. In fact, however, things are worse for gold investors than he implies.
First, if gold investors are wrong and the metal declines in value, there’s almost no floor that it couldn’t theoretically fall through. Gold—unlike other commodities—is pretty much useless by itself. Unlike oil, steel, natural gas, corn, or orange juice, it can’t do much other than look pretty. In recent years, the introduction of high tech ceramics has basically eliminated its major practical use as dental fillings. Many electronics use a minuscule amount of gold—it’s a good conductor—but they use so little that the contents of a mall jewelry store could easily provide enough gold for an entire year’s productions of iPhones. Gold’s prior use as an international reserve currency and, then semi-backing for the dollar, made it useful as a medium of exchange but, today, there’s literally nothing that one can buy with gold itself. So much gold has been dug out of the ground that it’s unlikely any set of circumstances could result in a true shortage of it for industrial applications. If confidence in the gold market collapses, the price of gold could get very close to zero. Since most other commodities have some practical use, their prices reflect actual demand. Gold simply reflects investors’ willingness to make a sucker bet.
Second, if the most bullish gold investors are right and gold will go up in value faster than everything else around, then that portends a series of big problems for the rest of the economy. If gold outperforms stocks and bonds in the long term, then the economy is in very serious trouble. One pretty well known free gold investment newsletter I get—by way of Casey Research—is well written, often funny, and, basically, argues that the U.S. economy is going to hell in a handbasket. To deal with this, Casey scribe David Galland—a very nice guy in person—suggests extreme measures such as renegotiating the entire national debt at ten cents on the dollar and ending all bank guarantees. (In fairness, he has also made it clear he thinks the gold bull market will eventually end.) If these measures become necessary, then we’re talking about something similar to a total economic collapse. In circumstances where every American becomes impoverished overnight and most economic activity ceases, it’s hard to believe that gold would retain any value. If society somehow descends into a dark age (which strikes me as hugely unlikely), the likely outcome is probably a lot closer to Mad Max-like battles over oil and other useful resources than gold coins.
Gold, quite simply, is useless. The gold bubble could last for several more years. But, in time, it will come crashing down.