You are here
NY Times' Floyd Norris: Pondering the causes of gold fever
By Floyd Norris
The New York Times
Thursday, November 25, 2010
http://www.nytimes.com/2010/11/26/business/26norris.html
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.
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 Fed'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.
... Dispatch continues below ...
Prophecy Receives Permit To Mine at Ulaan Ovoo in Mongolia
VANCOUVER, British Columbia -- Prophecy Resource Corp. (TSX-V:PCY, OTCQX: PRPCF, Frankfurt: 1P2) announces that on November 9, 2010, it received the final permit to commence mining operations at its Ulaan Ovoo coal project in Mongolia. Prophecy is one of few international mining companies to achieve such a milestone. The mine is production-ready, with a mine opening ceremony scheduled for November 20.
Prophecy CEO John Lee said: "I thank the government of Mongolia for the expeditious way this permit was issued. The opening of Ulaan Ovoo is a testament to the industrious and skilled workforce in Mongolia. Prophecy directly and indirectly (through Leighton Asia) employs more than 65 competent Mongolian nationals and four expatriots. The company also reaffirms its commitment to deliver coal to the local Edernet and Darkhan power plants in Mongolia."
The Ulaan Ovoo open pit mine is 10 kilometers from the Russian border and within 120km of the Nauski TransSiberian railway station, enabling transportation of coal to Russia and its eastern seaports. Thermal coal prices are trading at two-year highs at Russian seaports due to strong demand from Asian economies.
For the complete press release, please visit:
http://prophecyresource.com/news_2010_nov11.php
Or, as a friend of mine put it, You are buying gold because it is the alternative to this collection of stupid politicians around the world.
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 -- called "fiat money" by critics to emphasize that nothing real stands behind the value of currencies -- 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 a thousand 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 35th 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, 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 Fed'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.
In other words, imagine the late 1970s came back. We used to call that period "stagflation," and no one has fond memories of it. Those of us with money would be poorer, because the money would buy less. It would be even worse if we had lent the money for a number of years at the current low interest rates.
But the borrowers would be much better off, and just now they are the ones in the worst trouble. People with homes that now seem to be hopelessly underwater would find they could sell and pay off the mortgage. Banks would discover they had fewer bad loans than they thought they did. Unemployed people could afford to move in search of work.
Nominal gross domestic product would rise sharply in all of those countries, even if real GDP rose more slowly. The debt-to-GDP ratios that are now causing so much hand-wringing would be reduced, not by budget surpluses but by devalued debt.
Saying that a lot of people would benefit from something happening is not the same as explaining how it would happen. Just now, deflation looks more ominous in many Western countries. Ireland is planning to cut the pay of public workers, again, and fiscal tightening -- something needed to fight inflation, not deflation -- is the order of the day in many countries. We may think central banks blew it in the last decade, but we apparently will not do anything to help them in their current struggle. The plea by Ben Bernanke, the Fed chairman, for the government to find a way to invest more now while cutting spending later received little attention because the idea appeared to be a political impossibility.
It is distrust of elites that feeds some of the current gold fever, and that helps explain why it may make sense for one company that is promoting gold as an investment to hire G. Gordon Liddy as a spokesman. This is a man whose fame comes from committing the Watergate burglary on behalf of the very president who severed the last ties binding the dollar to gold, and is therefore vilified by gold bugs. But Mr. Liddy has an anti-establishment tint, and the intended audience is not committed gold bugs but instead worried and suspicious people. They may not be believers in gold, but they know all too well what can go wrong with investments in stocks and real estate.
Over the last four decades, the only ones in which gold was freely traded, gold proved to be a good buy precisely when it appeared the system was failing. In the 1970s, gold zoomed upward from artificially low levels, while stocks did not come close to keeping up with inflation. In the 1980s and 1990s, stocks rose at rates greater than 15 percent a year, and gold went down. In the first decade of this century, stocks declined while gold rose at a compound rate of almost 15 percent a year.
So far this year, both gold and stocks are up. That combination is unlikely to last out the current decade.
Betting that $1,400 gold will soon be $1,800 gold or $2,500 gold is basically a bet that the West really is in permanent decline this time, with countries facing the prospect of bankruptcy or sharp reductions in spending on everything from schools to pensions. Or perhaps all of the above.
Let's hope the bet is wrong.
* * *
Support GATA by purchasing a colorful GATA T-shirt:
Or a colorful poster of GATA's full-page ad in The Wall Street Journal on January 31, 2009:
http://gata.org/node/wallstreetjournal
Or a video disc of GATA's 2005 Gold Rush 21 conference in the Yukon:
* * *
Help keep GATA going
GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at:
To contribute to GATA, please visit:
http://www.gata.org/node/16
Sona Drills 85.4g Gold/Ton Over 4 Metres at Elizabeth Gold Deposit,
Extending the Mineralization of the Southwest Vein on the Property
Company Press Release, October 27, 2010
VANCOUVER, British Columbia -- Sona Resources Corp. reports on five drillling holes in the third round of assay results from the recently completed drill program at its 100 percent-owned Elizabeth Gold Deposit Property in the Lillooet Mining District of southern British Columbia. Highlights from the diamond drilling include:
-- Hole E10-66 intersected 17.4g gold/ton over 1.54 metres.
-- Hole E10-67 intersected 96.4g gold/ton over 2.5 metres, including one assay interval of 383g of gold/ton over 0.5 metres.
-- Hole E10-69 intersected 85.4g gold/ton over 4.03 metres, including one assay interval of 230g gold/ton over 1 metre.
Four drill holes, E10-66 to E10-69, targeted the southwestern end of the Southwest Vein, and three of the holes have expanded the mineralized zone in that direction. The Southwest Vein gold mineralization has now been intersected over a strike length of 325 metres, with the deepest hole drilled less than 200 metres from surface. "The assay results from the Southwest Zone quartz vein continue to be extremely positive," says John P. Thompson, Sona's president and CEO. "We are expanding the Southwest Vein, and this high-grade gold mineralization remains wide open down dip and along strike to the southwest."
For the company's full press release, please visit:
