Gold: All That Glitters May Not Make Your Fortune

Believers in economic doom have pushed gold past $1,100 an ounce. But the metal has made as many fools as fortunes

By David Von Drehle Monday, May 17, 2010
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    This pattern is as old as legal tender: gold is the contrary indicator of peace and prosperity. And the reason for this relationship is simple. When it comes to money, gold is, well, the gold standard. As other forms of stored value — paper banknotes, government bonds, inked entries in bank ledgers — came into widespread use, they were understood to represent actual amounts of precious metal. Someone with a pocketful of paper could, if so moved, exchange it for actual gold. When times were good, very few people felt any desire to do so. Gold was heavy and cumbersome compared with paper money. However, when times looked bad, the abstract symbols of value tended to break away from the underlying metal, because a government facing a crisis could print banknotes or issue bonds a lot faster than it could find more gold. The result is inflation, which eats away at the value of money. A really badly run government, like those of Weimar Germany or modern-day Zimbabwe, might create so much money that it becomes virtually worthless; in Harare, you can meet homeless trillionaires. Gold, however, never goes to zero. The menace of inflation leads some conservatives, like Texas Congressman Ron Paul, to talk about gold-backed money as "honest" money, in contrast to the money we have in our pockets. The U.S. cut its last link to the gold standard in 1971, but it was effectively finished prior to World War I by a series of credit shortages that led to bank panics. Gold may be honest, and tangible, but it is not nearly as powerful an economic tool as the more abstract forms of money that have taken its place.

    The miracles of the modern world weren't wrought by gold; they were wrought in large part by abstract money, because it has an attribute that gold can't mimic. It can grow. The Fed poured hundreds of billions of dollars into the economy to refloat it, backed not by gold but by the full faith and credit of the U.S.

    If everybody had to carry bags of precious metal around to buy things or if every ledger entry on a banker's computer screen had to be backed by a gold bar in a vault somewhere, economies would grow a lot more slowly or, in a panic, they would shrink. On the other hand, this engine revs only if people have faith that those ledger entries, those pixels, those scraps of green paper, represent actual value. Abstract money is an awesome thing — as long as people believe in it. But suppose that belief were to collapse one day and all the customers of the bank tried to empty their accounts at once. They would discover that the money wasn't there.

    On survivalist blogs and websites with names like Guns, Grub and Gold, they have a term for what will happen next: TEOTWAWKI , which stands for "the end of the world as we know it." When that time comes, along with freeze-dried food and water-purification tablets and plenty of ammo, a person is going to need some gold in his camouflage pockets. "Tangibles trump conceptuals" is among the key precepts of leading survivalist author and blogger J.W. Rawles. "Modern fiat currencies are generally accepted but have essentially no backing," he explains. "Because they are largely a by-product of interest-bearing debt, modern currencies are destined to inflation" and ultimately "to collapse." Rawles advises investing first in farmland, next in "useful hand tools" and finally in precious metals like gold.

    Thus, as global finance has grown ever more complex, gold has become a badge of mistrust in the modern political economy. A stack of gold coins in your gun safe, as an online survivalist put it in an anonymous post, signals that you won't be caught flat-footed when FEMA opens concentration camps, or when the U.N. imposes the new world order, or when terrorists wipe out the grid, or when the Mayan prophecy comes true, or when Israel attacks Iran and World War III ensues. Gold dealers have clearly figured this out; they advertise heavily on the radio talk shows of such doomsday-minded libertarians as George Noory, Glenn Beck, Alex Jones and G. Gordon Liddy.

    The problem with doomsday investing is that it's difficult to cash out. And you can be wrong for decades. An ounce of gold sold for $675 in January 1980. The price in January 2001: $265. The price of gold hasn't gone up any lately, as the global economy slowly recovers, and central bankers are serene about inflation. According to a blog on the Wall Street Journal 's website, gold has lost "luster" with China's government, and the International Monetary Fund is selling a big chunk of its stash. Is this the end of gold fever for now? That depends on which way the fear index goes. Here's something to watch, though: on some survivalist blogs, a hot debate has recently opened, led by skeptics questioning the utility of gold. The smart play for the well prepared, they now argue, is silver.

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