Gold and the Apocalypse
I always have found speculators in gold to be a strange lot. Indeed, they share with religious fanatics a profound desire for the worst. The religious extremists believe that redemption is only possible after the Apocalypse, and they have the audacity to believe that only they would survive to flourish in the “paradise” to come.
The gold bugs too await all types bad news – hyperinflation, economic and financial collapse, political and military turmoil, etc. The worse the news, the happier they are, for the more they expect gold prices to rise.
Wouldn’t it be ironic if the religious fanatics turned out to be right, and the gold speculators ended up among the evildoers? So even if the price of gold rose to astronomic levels just prior to the end, the people who amassed the hordes of gold would perish and never enjoy their wealth. I can see a movie here: “Wall Street 3: The fanatics vs. the gold crowd”.
Jim Rogers, a renowned investment guru and major gold bug, has predicted that the price of gold likely will reach $2,000 per ounce within the next 10 years. He might be right for no other reason than enough people believing that this will happen and investing to produce this result – self-fulfilling expectations the root of all bubbles. If he turns out to be right, this would imply an average annual return on investing in gold today of about 7%. This in turn implies an expected average annual rate of inflation of close to 5%.
If the average rate of inflation turns out to be much lower, say 2% per year, then the price of gold will not reach $2,000, except for the possibility of self-fulfilling expectations. However, the price would fall sharply from that level in the absence of bad news.
But where does the $2,000 target originate? On the one hand, it’s the next round number after $1,000. But good old Jim has a better answer. Gold’s high of $850 in 1980 adjusted for inflation is $2,300 today.
Why choose the 1980 high as the starting point? Choosing any other starting point and adjusting for inflation most likely would produce a price below the current price. A gold bug does not want to hear that perhaps gold is currently overvalued.
More importantly though, Rogers appears to be suggesting that the return on gold should equal the average annual rate of inflation. If so, investors could do much better, and with less risk, investing in real return government bonds. Rogers’ response to my “naive” recommendation is that the major governments are going to be bankrupt, so avoid their debt like the plague. But surely there will be some governments whose debt will not flame out – China for example. So why not invest in their bonds? Because gold fanatics believe in gold uber alles.
Personally, if I were to gamble, I would rather take my chances with stock options and credit default swaps. I just find it difficult and distasteful to invest in a commodity where I only would pray for bad news.