Do we really want $5,000 gold?

What does $5,000 gold really mean? Perhaps social chaos and, if so, who really wants that?

Author: Lawrence Williams
Posted: Friday , 26 Feb 2010

LONDON -

General talk of gold as a potentially spectacular investment as opposed to an inflation hedge glosses over the true picture. Over the ages, gold has kept up with inflation pretty well, and it will probably continue to do so in the future, but it may not make you wealthy, just protect whatever wealth you have. True there have been periods when gold has outpaced the decline in currency values due to inflation, but that is usually when it is playing catch-up from a period of underperformance.

Now some ultra gold bulls out there are predicting $5,000 gold - or even higher. While we think this unlikely in the foreseeable future, think what this means if it should come about. It can only really happen if there is an equivalent decline in the US dollar - or the onset of hyper dollar inflation. While some predict this also, the likelihood of a Zimbabwe situation with trillion US dollar notes buying less than a loaf of bread is hopefully rather more than we can see ahead. If that should happen then $5,000 gold will be the least of what we should expect from the gold price.

But coming back to the arbitrary $5,000 gold level. What this would imply is that the purchasing power of the US dollar would have sunk to around the equivalent of 20 cents today. Your $500 computer would cost you $2500 or your dollar loaf of bread would be $5. So you won't really have gained anything in the purchasing power of your gold, you'll just have done rather better than most of your fellow men, and women, in retaining what wealth you already have.

I can recall Ian Macavity at last year's New York Hard Assets investment conference, in talking about the economy and gold telling the gold bulls ‘be careful what you wish for'. A wish for $5,000 gold could also mean a wish for a total breakdown in society as an increasingly worthless dollar would mean the have-nots would have even less, if that is possible, and many of the middle classes would be turned into have-nots. Think Great Depression in spades - with perhaps a less disciplined, more violent, and gun toting, underclass than in the 1930s. That's pretty unpleasant to contemplate, but a huge rise in the gold price could well mean just that.

The more likely scenario is perhaps a less steep decline in the value of the dollar, likely leading to a gradual rise in the price of gold. True the dollar has made a bit of a recovery of late and gold hasn't really moved much one way or the other, but that's just because most of the currencies against which the dollar is valued are in just as bad a financial position - or worse. Gold has recently hit a new high in terms of the troubled Euro for example.

Eventually the various stimulus programmes around the world, achieved by printing more and more money, backed by nothing more than a politician's wing and a prayer, will inevitably lead to inflation. Prices will rise and the dollar will fall against currencies which matter - mostly those from the more resilient Asian economies - and gold will rise with it in dollar terms, if not in renminbi terms - but again probably not to the extent the true doomsayers project.

In an interesting article in the Daily Reckoning recently, Bill Bonner waxed eloquent on what gold has meant to the holder of the metal over the ages. One of his conclusions: "Gold is real money. At least, it's as real as money ever gets. Gold represents wealth. It can be exchanged for wealth. And since the above-ground supply of gold grows about as fast as the economy itself, gold tends to hold its value over centuries. Today, gold is worth about the same as it was worth 2000 years ago."

In other words, gold won't necessarily make you rich, but it will help preserve your riches! From time to time it will move above and below the inflationary trend and these movements, if judged correctly, offer buying and selling opportunities which can improve your wealth, but unless you have huge sums to invest, probably not significantly.