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The Gold Bubble

from the magazine

The Gold Bubble

The latest craze lacks mettle. Summer 2010

From ancient Egypt to the Middle Ages and beyond, adventurers have tried to transmute base metals into gold. They’ve used private incantations, exotic lore, and secret formulas. Nothing worked—until now. A group of entrepreneurs has just discovered a way of taking nickel, copper, and zinc and turning them into bullion. It’s called the television commercial.

Speaking with the authoritative voices of Wall Street gurus, spokesmen—including the old Nixonian G. Gordon Liddy, commentator Glenn Beck, and actor Dann Florek—have persuaded thousands of investors to trade their hard-earned cash for gold. And why not? After all, the goldbugs point out, the government can print money, but it can’t print gold. The precious metal has tripled in value since 2001, and it may rise even higher, providing an ideal hedge against inflation. Plus, throughout human history, gold has always had some value. In the spokesmen’s words, “it’s never been worth nothing”—unlike certain securities that went south in the recession.

This all sounds plausible until the prospective investor takes a second look and realizes that there’s no logical reason that gold should retain its stratospheric value. One can measure a company by its price-to-earnings ratio, its rate of dividends, its management competence, and its history. Gold, by contrast, is simply an element dug from the ground. Its price is determined by what people can be persuaded to pay for it, not any intrinsic worth. Further, gold is not only prohibitive to purchase these days; it’s expensive to keep, lying in a guarded safe-deposit box.

In his multiple-edition book Stocks for the Long Run, Jeremy Siegel comments on the questionable history of gold for the U.S. investor. He charts the rise of two separate dollars invested in 1801—the first in stocks, the second in gold. The dollar invested in stocks, he notes, would be worth $8.8 million today; the dollar invested in gold would be worth $14.

It’s true that gold has enjoyed a dramatic rise in price over the last few years. But so did dot-com companies and real estate before their bubbles burst. It’s well to remember, too, that gold produces no tangible income. Companies do. Gold provides no jobs (except, of course, for those who peddle it). Companies can. And gold isn’t regulated. Companies are.

Ergo: gullible viewers should keep a 24-carat caveat emptor in mind every time they pick up the remote.

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