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The Golden Compass

To Guess Where Gold Is Headed, Start With Its Past

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Before sending an expedition to explore the New World in 1511, King Ferdinand of Spain made clear one of his objectives. “Get gold,” he ordered his commanders, “humanely if you can, but at all hazards, get gold.” Five hundred years later, some investors still lust after the metal.

But gold fever has waxed and waned over time. Gold was a profitable haven from geopolitical turbulence and soaring inflation in the 1970s. During the subsequent 20-year disinflation period, gold fell by two-thirds before rebounding sharply since 2001. The latest leg of the bull market is being driven by fears of future inflation plus concerns that the low interest rates needed to keep the U.S. economy afloat will exert long-term downward pressure on the dollar.
For historical price information on gold, visit the Gold Price site. MeasuringWorth has data on gold’s value dating to 1257. Finally, to dig into the metal’s mystical past, download or view online the BBC documentary “Gold.” There’s also a four-part summary of the history and culture of gold on the World Gold Council website.
One problem in assessing gold’s investment viability today is the need to untangle its economic worth and market valuation from ideological biases of its supporters and detractors. (See “Random Walk,” for additional insights on investing in gold.) Some people believe the United States would be better off had it remained on the gold standard, which President Franklin Roosevelt abandoned in 1933. President Richard Nixon subsequently dumped a quasi-gold standard in 1971.
It’s possible that those politically disparate presidents erred in resorting to fiat money. But a paper by Barry Eichengreen of the University of California, Berkeley, and Douglas Irwin of Dartmouth College argues that countries that abandoned the gold standard during the Great Depression suffered less economic damage and were less likely to inflict damage on other nations through protectionism.
A Federal Reserve Board study said: “Although the gold standard provided a basis for nominal stability over the long run, the U.S. and world economy suffered in the short run through periods of depression and inflation due to changes in the world’s supply of and demand for gold. Moreover, the U.S. commitment to the international gold standard had a cost: It confined, though it did not preclude, discretionary management of the domestic economy.”
The bottom line: Gold doesn’t appear to be in a bubble, but as is the case when considering any investment, caution is always warranted after a long bull run.

Websites of Interest

Gold Price
The BBC’s “Gold”
“The Protectionist Temptation: Lessons From the Great Depression for Today”
“The International Gold Standard and U.S. Monetary Policy From World War I to the New Deal” (Federal Reserve Bulletin, June 1989)
World Gold Council history and culture

Thomas D. Saler is a free-lance financial journalist based in Madison, Wis.

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