Buy gold at these prices? Two views

Gold, which hit a record high of $1,072 an ounce in mid-October, made a run at that level in Asian trading on Tuesday, reaching $1,066.90 an ounce before pulling back.

The metal had jumped $13.70 to $1,053.40 in New York trading on Monday as its bitter rival, the U.S. dollar, slipped after rallying on Friday. UPDATE at 10 a.m. PST: Gold has reached a new high of $1,085 an ounce in New York.

Would you buy gold at these prices, after nine straight years of gains? And if so, what’s your motivation? Inflation? Deflation? Fear of global pandemonium?

Two Wall Street figures now well-known for warning of the financial mayhem of a year ago -- hedge fund manager David Einhorn of Greenlight Capital, and New York University Economics Prof. Nouriel Roubini -- have two very different views of gold, at least in the near term.

Einhorn, who began buying the metal itself and shares of gold-mining firms after the financial crisis unfolded last year, said in a speech last month that he’s still big on gold as an insurance policy and as an alternative to major currencies and "cash" accounts.

From the speech (link from zerohedge.com):

"I have seen many people debate whether gold is a bet on inflation or deflation. As I see it, it is neither. Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible. Gold did very well during the Great Depression when FDR debased the currency. It did well again in the money printing 1970s, but collapsed in response to Paul Volcker’s austerity. It ultimately made a bottom around 2001 when the excitement about our future budget surpluses peaked.

"Prospectively, gold should do fine unless our leaders implement much greater fiscal and monetary restraint than appears likely. Of course, gold should do very well if there is a sovereign debt default or currency crisis.

"When I watch Chairman Bernanke, Secretary Geithner and Mr. Summers on TV, read speeches written by the Fed Governors, observe the 'stimulus' black hole, and think about our short-termism and lack of fiscal discipline and political will, my instinct is to want to short the dollar. But then I look at the other major currencies. The euro, the yen, and the British pound might be worse.

"So, I conclude that picking one these currencies is like choosing my favorite dental procedure. And I decide holding gold is better than holding cash, especially now, where both earn no yield."

By contrast, Roubini thinks that anyone expecting significant appreciation in gold soon from this point is dreaming.

From an interview Roubini gave last month with IndexUniverse.com:

"I don’t believe in gold. Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity, and demand is weak, and there’s slack in the labor markets with unemployment peeking above 10% in all the advanced economies. So there’s no inflation, and there’s not going to be for the time being.

"The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression. But we’ve avoided that tail risk as well. So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense. Without inflation, or without a depression, there’s nowhere for gold to go. Yeah, it can go above $1,000, but it can’t move up 20-30% unless we end up in a world of inflation or another depression. I don’t see either of those being likely for the time being. Maybe three or four years from now, yes. But not anytime soon."

Who makes the more convincing argument?

-- Tom Petruno

Photo credit: Frantzesco Kangaris / Bloomberg News

Comments

[POed Tax Payer]

If I only bought 1000 ounces of gold when it was $35!
It would be worth $965,000.00 and I could leave bankrupt Kalifornia and retire in Oregon!

[Gold Stockholder]

I worry a lot more about the safety of my cash holdings than I do my gold stocks.Gold has been accepted as money for thousands of years.The U.S. Dollar is relatively new and has declined 98% since the founding of the Federal Reserve in 1913.Financial conditions in the U.S. are the worst in it's history and the govt has no other option to reduce it's debt than through currency devaluation.Be worried if you have much of your wealth in Dollars or any asset payable in Dollars,such as bonds.

[Marcus]

Roubini is correct. Deflation is the far larger issue. I'm not an economist but my macro econ understanding is it's just not the amount of money being made available but the velocity of money - i.e. money not in stocks, bonds, gold or cash, but money in circulation changing hands at a faster rate, chasing goods, and pushing prices up as demand outpaces supply.

My worldview is pretty limited, but I just don't see money chasing goods. I see the opposite. People out of work spending little. People afraid of being out of work, spending little. Other than Wall Street bankers and government employees, most everyone is not getting a raise this year. I see a bear market rally but most everyone still sitting on 20%+ declines in their 401ks. I see housing prices falling from San Diego to Boston. Most everything you buy is on sale. And so on.

The case can indeed be made for gold as a temporary store of value due to uncertainty. But the long-term thesis of holding gold since "only gold coins will be the only tender of value" is pretty much limited to gold bugs and gun nuts. If things get that bad no one will want your silly gold coins, but your water, food and ammo. That said, holding some physical gold or shares in gold companies isn't a dumb idea. But we're talking a few percent of your assets.

There's a famous saying to remember about gold: Gold takes the stairs up, but the elevator down.

[Ed]

People thought gold was expensive when it hit $900 an ounce, now they see it as a great deal when it's $1,050.

[POed Tax Payer]

Besides Gold or Silver, no debt, having land in a remote area (Washington, Montana, Idaho) with plenty of resources and some foreign money
My plans are to move along the Northern border so when the dollar caves in and LA and the rest of the big cities are going up in flames, and the police and National Guard are powerless to stop them because our military is over seas, I will be able to walk across the border and get my supplies and Meds
Good luck to all the good hard working middle class tax payers

To hell with all the Politicans, Welfare, Illegal Alien, Gang, Mega Rich and Hollywood Elete Garbage!
May they all kill each other!

[Adonis]

Gold 2,000 USD is coming soon to a theater near you....
China will buy the additional 200 tones for sale from the IMF soon keepting it off the market.
Germany wants their gold holdings back from USA storage.
Hong Kong wants their gold holdings back from London storage.
Everyone is going to want PHYSICAL gold only soon.
Supply vs. Demand, no trust in paper money, currency crisis, etc.

[terrymac]

Per Milton Friedman, inflation ( increase in money stock ) is already here. Expect to see prices rise with "a variable time lag" -- late 2010, or 2011. We haven't seen consumer prices rise because banks haven't been lending. At some point, the government and the federal reserve will do whatever it takes to "stimulate" spending, and double-digit inflation will come roaring in.

[H. Craig Bradley]

HEADING FOR A CLIFF AND A FALL ?

The Middle East, particularly Iran and its nuclear development program are a "joker in the deck". You could say the whole region is a tinderbox. The future is as uncertain as it ever has appeared.

So, if Iran has a deployable nuclear armed mid-range missile (Schab-3) in a few more years, then look out. They will either threaten others to get what they want or if Israel preempts them, fire one off. Anything could happen over there because of their traditional conflicts and an abundance of tribal, ethnic-religious, cultural, and political hate (leaders).

The other unpredictable element is N. Korea. In reality, we are talking about China because of their proximity and influence over North Korea. China wants to dominate its region and those parts of the world (Africa) where they are locking-in long term oil development contacts for future supplies. We are in political and economic competition. China could be a factor in the Middle East, for good or for bad. Time will tell.

So, gold is a hedge against an unstable and uncertain future as America, however weakened, is likely to face many more challenges, both economic and political. In the mean time, the U.S. Dollar is what we buy and sell with. Oil remains priced in dollars.

Remember, gold is NOT fungible. That is, you can not take a Maple Leaf ( 1 oz.) or American Eagle (1 oz.) and buy a suit at a store with it. Gold coins are only readily worth what they are denominated in: 1.00 U.S. dollar. To use physical gold for transactions, it must first be converted into money (paper money in dollars) through a gold dealer. Converting physical gold into a form of useable money for transactions requires payment of a fee of about 5%).So, you don't want to convert any more gold than needed.

Another issue is storage. If you own much gold, then you have to secure it, either in a vault or in a big safety deposit box. If the bank is closed, you loose access. If you store much gold at home, you need an alarm system and insurance (again, in dollars). If you are in a bad area, then you need weapons to defend youself and the ponderosa. Owning gold is not problem free.

Add to that the Secret Service does not consider "gold or silver" coins to be "money", only paper.
My understanding is the Secret Service has little interest in enforcing against counterfit collectible coins.So, beware because there are reports of pandemic counterfit in Southern California with fraudulent silver dollars circulating around. Like the old gold prospector in 1850 California, you must determine purity and authenticity yourself with a chemical test.

The U.S. Mint has discontinued production of 1/4 ounce, 1/2 ounce gold and silver coins for some "phony" reason. ( not enough blanks)The more likely truth is they do not want fungible coins in precious metals widely available for a money substitute when the International Bankers and the Federal Government decide it is time to collapse the U.S. Dollar and push everybody into a cashless economy with absolute control of every individual transaction digitally. It will be very Orwellian when they spring the trap accompanied by other actions as well (Martial Law).

[POed Tax Payer]

>Remember, gold is NOT fungible. That is, you can not take a Maple Leaf ( 1 oz.) or American Eagle (1 oz.) and buy a suit at a store with it<
.
Actually there are stores now advertising that they will accept payment in Gold and Silver
The Local Korean run market will take silver coins
As paper money gets more worthless you will see more smart, savi business owners start dealing in gold and silver for payment
The main question is will our corrupt Government confiscate Gold in the near future

[H. Craig Bradley]

GOLD vs. THE PEOPLE

Where are you going to securely store 62 lbs of gold ingots? (1,000 ounces / 16 oz./lb). Urban (Portland) and suburban Oregon is crawling with homeless, unemployed, low-income, Meth cookers, Meth Addicts, and assorted petty criminals (property theft)

I guarantee eventually someone will find out about your gold stash and like Yogi The Bear, break-in and then run off with your "Pick-a-nik Basket" in no time. The Oregon courts (judges) generally do not incarcerate for property theft (felony or Misdeameanor). Most offenders are given a summons or court date and released.

The growing consensus in Oregon is: "What's Mine is Mine, and What's Your's- Well, We Will Think About That.