, Newburyport, MA


February 1, 2011

Taking the glitter out of gold

Have you noticed all of the appeals to cash in your gold jewelry? Or the news articles about the rising price of gold? Has your broker recently recommended you buy gold?

The hype is on. In fact, the price of gold has bubbled in the last couple of years and is on the verge of bursting. Small investors are bidding up demand for gold, but this is all speculation.

There are no economic reasons for this upsurge. It is all based on fear. Actually, a myriad of fears. The fear of inflation. The fear of currency devaluation. The fear of China. The fear of government. The fear of our economic system. The fear of not being altogether clear about what to fear.

The price of gold appears to have climaxed on the first business day of 2010. Since then, the price of gold has dropped 6 percent. If fears of many kinds were driving its price up, then we might conclude that those fears are dissipating. And there is some economic evidence to support the overall reduction in fear or, alternatively, the increase in positive outlooks.

Matt Whittaker writes in the Wall Street Journal, gold lacks a strong "direction because investors are vacillating between fear and optimism about the global economy." Gold is a magnet for bad news: the "badder," the gladder the gold owner.

As long as the Federal Reserve continues to buy U.S. Treasury bonds as a means to keep interest rates down, gold may continue to sustain its appeal as an inflation hedge. But, on the other hand, the Fed may be easing off on its qualitative easing — the official name of its bond purchasing. The Fed seeks to hold the line on interest rates and Treasury yields in order to boost the appetite for risk or borrowing.

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