Gold is a hot topic around Southgate Coins at the present. We are receiving lots of inquiries about the most precious of all precious metals: many of them from first-time speculators. On the surface, this current wave of enthusiasm in the bullion market appears to be just the boost the rare coin hobby needed. We look for the good in it all, but is there an underside? Read on.......
A Rise in the Price of Gold?
April 14, 2006
By Rusty Goe
Good Friday is always a good time to look for something good in everything which concerns us. With the price of gold tip-toeing around the $600 mark it seems appropriate to focus in on all the good associated with this upward surge. Who, you might ask, benefits most from high gold prices? And, what do rising gold prices reveal about the state of our economy, the strength of the U. S. dollar, and the approval rating of the President? Do the advantages of a strong gold market pervade all sectors of society? For goodness sakes, gold must be good; and higher prices, even better. Everyone should have their own potful of it; and that pot should appreciate at a steady rate every year. In the same regard, everyone should be able to eat whatever they want and never gain weight. Whoops, that's another topic. Back to gold: we love it because it is appealing to our eyes: it inspires us and it conjures up feelings of sublimity. Dorothy isn’t the only one who dreamed about skipping along a yellow-brick road. And how about the ultimate: Heavenly streets paved with gold. With all this said, finding good things to reflect on about this bull market in gold should be no problem.
Don’t you get a rush when the price of gas rises? Some people do. Owners of oil companies quickly come to mind; as do controlling cartels in oil producing nations. But for the rest of us, higher prices at the pump can dampen the spirits of even the most optimistic souls in our midst. How about inflation in the live cattle, corn, and soybeans markets? Higher food costs, bigger tabs when we dine out; it all trickles down. These are commodities, just like gold; but for some reason, we usually don’t get excited when prices spike.
But we’re supposed to be looking for the bright side of an appreciating gold market. In the rare coin industry, lively bullion activity translates into brisker business. With gold constantly in the headlines, the phone rings more often, customer traffic increases, and awareness of all things round, small and metallic begins to peak. People who visit our store seeking Krugerrands, occasionally wind up crossing over into numismatics; sometimes becoming infatuated with building a set of "CC" coins. This is good. News reporters are more apt to run feature stories on the precious metals market during times like these providing free publicity for local coin shops and the coin hobby in general. Not too long ago, when a newswoman from the local NBC affiliate interviewed me about the gold market, I snuck in a plug for Carson City coins, and was even able to get a camera shot of the 1873-CC Without Arrows dime on film. That was really good.
Certainly, investors who purchased gold at lower levels consider recent price gains good enough to cheer about. As do gold mining companies, who see their profit margins increase, the more they produce. Jewelers, especially those who purchased much of their inventory before the bull market began, are blessed with good tidings as gold prices climb higher. Not to mention the increased sales volume generated from heavier customer traffic. One group, whose enthusiasm borders on elation during times like these, are the gold-bugs; simply defined as: adherents to a belief system which espouses the sovereignty of gold in contrast to the instability of big Government. After years of unfulfilled prophecies these gold-bugs finally get to tell the world, "we told you so." For them, as well as for all gold groupies, it seems like a good time to look deep into their crystal balls and begin predicting prices of $1,200 – actually at this point, the sky’s the limit.
With all the good gushing out of the current gold craze, are there any negative factors to consider? Not wanting to be a Mr. Mulligrubs, I feel obliged to offer several observations inherent in exuberant bullion bull-runs. The last time anything resembling current conditions in the metals market occured, it played itself out over an 18-month period between 1979 and 1980 Ayatollah Khomeini had returned to leadership in Iran, American hostages had been captured in Tehran and a scary nuclear accident at Three Mile Island alarmed the nation. While his approval rating plummeted, Jimmy Carter told a nationally-televised audience in July of 1979 that he realized American citizens were suffering through a "Crisis of Confidence" in his ability to ameliorate problems in the country. Rising oil prices contributed to an inflationary milieu, which sent interest rates sky-rocketing and caused burdensome gas shortages. At one point, Carter asked for the resignations of his entire cabinet, further diminishing his credibility in the eyes of the public. Government spending surged to abhorrent levels as U. S. Government debt came under severe pressure. Meanwhile, the price of gold rose from approximately $300 per ounce in August of 1979 to a high of more than $850 by January of 1980. A term, coined by economist Robert Barro, summed up prevailing sentiments. Barro called the combined rates of inflation and unemployment his Misery Index. And President Carter said no one who allowed this Misery Index to reach the 13% mark deserved to lead the nation. By the time Carter lost his bid for a second term to Ronald Reagan in 1980, the Misery Indexstood at just a tick below 22%. While his detractors snarled through gritted teeth, gold-bugs partied in the streets. With prices reaching $500, $600, $700, and then $800, these disciples of tangible investments, gleefully proclaimed to the world that "we told you so." Notwithstanding the terrible economic crisis facing the nation these Ruffians against fiat currency predicted that gold prices could easily quadruple within a year, possibly breaking the $5,000 per ounce barrier before the next president had been in office less than a year.
As history reveals, January of 1980’s peak of just over $850, would be the top of the market. Prices hovered between $500 and $700 throughout 1980 until subsiding into a prolonged bear market for much of the next two decades. Then, a new man rode into town from Midland (Crawford), Texas, destined to revive the legacy of the Carter White House. George W. Bush needed a little help to awake the gold-bugs and to return the nation to a "crisis in confidence" state of affairs. Tragically, the horrific 911 terrorist attacks spring-loaded the resurrection in bullion prices: followed by the cataclysmic tsunami in Indonesia at the end of 2004; and the hurricanes that devastated the U. S. Gulfport in 2005. Added to these apocalyptic events, President Bush’s decision to attack Iraq, and his overall persona of ineptitude, have not been viewed as confidence builders. And just as in the Carter Administration, there have been shakeups in Bush's cabinet; further deteriorating the faith U. S. citizens (and the rest of the world) have in his leadership ability.
With billions of dollars spent on the rebuilding of the nation post-911, and even more money printed to cover the costs of relief efforts for tsunami and hurricane-ravaged parts of the world, the strength of our country’s currency continues to falter. Then, as President Bush continues to wage a war opposed by a majority of the populace, with thousands of U. S. troops being killed and injured, the national debt continues rising to obscene levels. As a result of this massive spending, combined with the perceived notion that the U. S. Government is in shambles, the dollar, once the strongest monetary symbol in the world is no longer the currency of last resort. For the time being, gold is being considered a candidate for that honorable position. Gold has not necessarily appreciated to the extent it appears to have on paper; instead, the U. S. dollar has lost much of its value in relation to it. This has given the gold-bugs something to shout hosanna about: their golden idol is temporarily on the throne once again. Will it remain? Could this be the real second coming which will lift prices skyward?
The truth is, no one can foretell this. Who can possibly predict if more terrorist attacks, tsunamis, and hurricanes are on the horizon? How many more U. S. troops must be killed before our Government pulls the plug on the war in Iraq? Is the United States doomed to failure; will its dollar become as worthless as a German Reichmark from before World War II? Are we headed for $10 a gallon gasoline and double-digit interest rates? Will food become so expensive that only the wealthy will be able to eat three square meals a day? And who will the wealthy be if the dollar becomes obsolete? Under these conditions, if the price of gold rises to $10,000 per ounce, according to today’s monetary standards, what currency will it be evaluated in; and who will be able to afford it? Will there be two classes of people: those with gold; and those without? These are mysteries waiting to be revealed. Six and a half years ago, gold seemed ridiculously undervalued; languishing between $250 and $270 per ounce; but no one wanted it then. Major stock brokerage houses were predicting that the price of gold could drop below the $200 mark. But then, the Y2K scare shook the sagging metals market out of its slumber, boosting prices temporarily, until the threat passed. So now, gold is valued at more than double what the depressed prices were during 1999. Is this a major increase? On paper, yes; but in terms of true value, no. Gold prices should not have been as low as they were back then. It took a man from Midland (Crawford), and a few catastrophic disasters to correct gold's undervalued position.
But for now, everyone who has placed their bets on the precious yellow metal can rejoice in the streets; jumping up and down just like someone picking the winner of the Kentucky Derby. Join in and sing this song:
"Gold is great,
Gold is good,
Let us thank it
For our food"
Just remember what it means when the price of gold begins to rise: If you are a gold-bug, you are joyful that there are problems facing the nation and the world. You are thankful that a war is being waged in a remote part of the earth; and that lofty gas prices are limiting the amount of miles families can travel on vacations during the summer. And, it just tickles you pink that there’s a man in the White House with one of the lowest approval ratings in history. Bush's approval rating of 36% has a ways to go before it descends into the depths of Richard Nixon's 24%; but if it continues its current slide, gold could still have some appreciation left. Keep a close watch on the Bush Approval-Rating Meter: Down goes Bush, up goes gold. But be prepared for what will happen to the price of gold if the war in Iraq ends; if disasters - both natural and man-made - diminish for a season; if a respected leader once again occupies the White House; and if the U. S. dollar strengthens: much of the metal's recent gains could evaporate quicker than you can say alchemy.
You must also remember that the rise in price is not measured against the value of a U. S. dollar before the rise began, but in terms of a depreciated dollar, losing its value by the week. Do you really believe that the $850 which purchased an ounce of gold 26 years ago is equal to $850 today? Or, could the same $600 which buys an ounce of gold today have the same purchasing power as $600 26 years ago? Get out your inflation meter and check the statistics. If you really believe that there can be perpetually rising gold prices at the same time there is strength and solidarity in the government and in the economy, with no disasters or wars, you are a candidate for one of the potfuls mentioned earlier.
Not that gold is not worth good money; it has always been valuable relative to other commodities, dating back to ancient times. In the late 19th century, gold's value floated around $19 per ounce; and the U. S. Government minted $20 gold pieces using a few grains short of an ounce per coin. This amount represented a week’s wages for many common workers: the head man at the Carson Mint during the 1880s earned $58 per week in contrast. Of course, twenty U. S. dollars were worth considerably more in the 1880s than the same amount today. At $600 per ounce, an ounce of gold represents a week’s wages for a $15 an hour worker today.
And, there is nothing intrinsically wrong with gold: it is the most beautiful metal on earth. Lovely things are made with it; from rings and necklaces: to rare coins and bars of bullion; to wine goblets and royal crowns. Life would not be the same without the glitter of gold. And every once in awhile, shrewd investors and occasional lucky saps, time the market just right and reap a tidy profit. There are potfuls of the stuff at the end of rainbows; just as there are roads made with bricks of it; and streets paved with more of it than the eye can see. And although this can all be seen as good, a word of caution to the wise is in order: Whenever newspaper headlines are heralding a new bull market in gold; whenever there are a zillion hits on Google when the word gold is entered; and whenever the good ol' boys on every street corner and in every barber shop are talking about adding a little gold to their portfolios, please realize that it's probably fair to say something on the order of "Houston, we might have a problem" - or maybe that's Midland (Crawford).
Special blessings on
Good Friday, and
Happy Easter to you all