What Price Gold?

Gold has hit a new all-time high price, above $1,035 per ounce. The run-up in gold prices has been striking — five years ago, the trading price of gold was slight above $400 an ounce, and since last November gold has increased from less than $750 an ounce to its current record level.

Why has the price of gold increased so dramatically? Historically, gold has been viewed as the safest investment in times of uncertainty and potential inflation. If you thought your government was going to collapse, or our currency was going to be undercut by dramatic inflation, you didn’t want worthless paper or coins, you wanted gold because it would retain its value under any circumstances or regime. (Ask any citizen of the Confederate States of America or the Weimar Republic if you don’t believe me.) I think the increasing price of gold signals that many investors, worldwide, are not convinced that the current economic woes are behind us and they therefore are hedging their bets retreating to an investment that dates from the earliest days of capitalism and commerce — even though the unprecedented price of gold makes buying at this point a significant risk.

Surveys of consumer confidence are fine, but whether people are willing to pay more than $1000 for an ounce of gold says a lot more to me about confidence in the economy than any survey ever could.

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