Pardon Me, Mr. Paul Krugman, You Are Wrong About Gold

Wednesday, 01 May 2013 07:40 AM

By Mike Fuljenz

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New York Times economic columnist Paul Krugman is widely followed by the left. He is their economic champion. He won a Nobel Prize and has a best-selling book out. But his opinion pieces in The Times are sometimes clouded with errors and partisan politics, even while he boldly accuses the other side of gross errors in the service of partisan politics. This was particularly true of his April 11 column, “Lust for Gold.”

First, Krugman said, “Historically, gold has been anything but a safe investment.” To prove that outrageous point, he focused on the times when gold’s price declined, without a long-term perspective to show that gold has far outperformed stocks, bonds, the U.S. dollar and most other investment categories since gold was untethered from its government-imposed $35 anchor and allowed to trade freely in 1971.

He then said, “The modern world’s closest equivalent to the classical gold standard is the euro, which puts European countries back under more or less the same constraints they faced when gold ruled.” If that’s the case, why has gold risen from $255 when the euro was launched in 1999 to over $1,400 today? The euro was born at $1.18 in 1999. Now it is up about 10 percent to $1.30, while gold has risen by about 460 percent.

Krugman also maligns gold as just “a decorative metal” with little practical value. He ignores the role that gold has served for over 4,000 years of recorded history. Aristotle listed the virtues of gold as money over 2,300 years ago. Gold has formed the financial bedrock of our nation during most of its wars, when paper money values often deteriorated rapidly, such as with the Continental currency in the Revolutionary War, Lincoln’s Greenbacks in the Civil War and rapid postwar inflation in the 20th century after World Wars I and II and the Vietnam era of “stagflation.” If gold has no “inherent value,” isn’t that more true of paper?

Massive New Waves of Physical Demand Continue to Lift Gold

In April, the U.S. Mint ran out of its 0.1 ounce gold coins, due to strong demand. April is on schedule to become the Mint’s best month since December of 2009 in the sales of U.S. Mint products, across the board. The Royal Mint in the United Kingdom said that its gold purchases tripled. Gold demand in Turkey caused delays in coin deliveries by its national mint in Istanbul. The Perth, Australia, mint has also seen an “enormous number of people” (according to its treasurer, Nigel Moffatt) buying gold.

Premiums paid by India’s jewelers surged as much as fivefold within 10 days, up from $2 an ounce to $10 an ounce in premiums, according to the Bombay Bullion Association. Central banks continue to buy gold regularly, including central banks in Russia and Kazakhstan, according to the International Monetary Fund.

Wall Street is beginning to wise up to the fact that they are the “odd man out” in the gold market. Wall Street hedge fund managers are styled “Masters of the Universe” in their little island world of Manhattan, but they tend to be on the wrong side of the trade where gold is concerned.

Citi Research pointed out recently that “gold demand is not all about speculators and [exchange-traded funds] … physical demand/investing can offer an important support for pricing when ‘paper’ investors bail.” Looking at history, Citi added, “The recent headlines reporting a pickup in jewelry and coin demand following the sharp April price drop is generally consistent with history and an important reminder that gold supply/demand can matter at times.” (Duh!)

Donald Selkin, who is on the management team that controls about $3 billion in assets for National Securities Corporation in New York, said, “It’s bizarre that the [gold] price has come back so rapidly. After the big decline, demand jumped like crazy. It’s the old rubber-band theory. You stretch too far, and eventually it snaps back. Banks came in to buy, and there is record demand for coins around the world.”

Maybe if Wall Street is on the wrong side of the trade often enough, they will eventually wise up.

About the Author: Mike Fuljenz
Mike Fuljenz is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of the NLG award winning Michael Fuljenz Metals Market Weekly Report. Discover more by Clicking Here Now.

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