It is part religion, part politics. It is a way to voice a lack of confidence in the central banks of the world and a yearning for the world as it used to be.
Gold prices continued to rise, crossing $1,400 an ounce earlier this month, as investors shied away from equities and bonds.
It is an investment that historically made sense when inflation was rampant, and yet it is soaring while the Federal Reserve frets about the threat of deflation.
It is gold.
It is tempting to view the soaring price of gold, which went above $1,400 an ounce earlier this month and remains close to that level, as a warning of imminent inflation. Such interpretations have fueled critiques of the Fedâ??s latest round of monetary stimulus as being the forerunner of a collapse of the dollar.
But I think it reflects first and foremost a dismay at the current state of the world economy, and a conclusion that the elites who are running it do not know what they are doing.
Or, as a friend of mine put it, â??You are buying gold because it is the alternative to this collection of stupid politicians around the world.â?
It is not easy to have a calm discussion about gold. There are people who all but worship it and there are people who view it as a barbaric relic of an earlier era.
If you are in the latter group, you probably look at it as just another commodity, whose price should reflect the demand for it in various industrial uses and for jewelry.
That analysis basically prevailed in the 1990s. That was an era of growth around the world, and it was the time when central bankers convinced governments that they deserved independence in the pursuit of wise monetary policy.
But the last decade was another matter, as was the late 1970s, when we had the last explosive move for gold bullion. Then the problem appeared to be runaway inflation. Now the problem seems to be perpetual weakness in rich economies that have been hobbled by debt foolishly taken on by people from bankers to subprime home buyers who had one thing in common: a belief that the risk of something going very wrong was all but nonexistent.
The problems of 1980 and 2010 manifested themselves differently, but they led to the same conclusion: that the modern monetary system â?? called â??fiat moneyâ? by critics to emphasize that nothing real stands behind the value of currencies â?? does not work. Gold is the alternative.
You could argue that having gold behind a currency is also a form of fiat, that gold should be worth its value as a commodity rather than seen as a great and perpetual store of value. After all, gold was a very bad investment for 20 years, from 1980 to 2000. And why should the world decide that something found in South Africa is more valuable than a resource found elsewhere?
One advantage of gold, of course, is that it does not deteriorate with age. Gold mined 1,000 years ago may be in that ring on your finger. Other things do not last. A banana standard might seem like a wonderful idea in Central America, but it would not work.
A disadvantage of gold as an investment is that it costs money to store and produces no income. But who cares these days? The yield on short-term Treasuries is almost nothing. To get any kind of interest rate, you have to take some real risks of the type that blew up so spectacularly in 2008 and 2009.
People my age can recall when the dollar was worth precisely one thirty-fifth of an ounce of gold. But that was near the end of the era when currencies were tied to gold in any way. The United States government had made it illegal for us to own gold, for fear we would buy it and drive up the price. There was a lot of inflation between the time Franklin Roosevelt set that ratio and the time that Richard Nixon severed the link, but the stated gold price remained the same.
During the last gold boom, there were other ways to bet on the continuing failure of American political leadership. One could buy German marks, or Swiss francs or Japanese yen. All those economies appeared to be much better managed than those of the United States or Britain.
Now there are fewer alternatives. Those who think the big inflation is coming in the United States do not think we will suffer alone. If the Chinese renminbi were a freely traded currency, people would flood into it and drive the price up. But of course China is determined not to allow that, and the rest of the world appears powerless to do anything but mutter about how unfair it all is.
The international furor over the Fedâ??s quantitative easing shows how sensitive countries are to the prospect of other currencies losing value against their currency. It is not easy to conjure up a situation in which the dollar plunges for a prolonged period against the euro or the yen. In fact, the opposite has happened since the Fed spelled out its plans.
There is a real threat of inflation in China and some other developing countries, but the rest of us can only wish we were so lucky.
I say lucky because there is a case to be made for the current desirability of rising prices. Imagine for a moment that asset prices in the United States, and Ireland and Spain, for example, rose sharply over the next few years, as measured by euros and dollars. Imagine that incomes rose much more slowly, so that real inflation-adjusted incomes fell even though nominal incomes rose.
Floyd Norris comments on finance and economics in his blog at norris.blogs.nytimes.com.
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