gold fever redux

I wanted the gold, and I sought it, I scrabbled and mucked like a slave. Was it famine or scurvy - I fought it; I hurled my youth into a grave. Robert Service Gold fever has struck the Yukon again.

I wanted the gold, and I sought it,

I scrabbled and mucked like a slave.

Was it famine or scurvy – I fought it;

I hurled my youth into a grave.

-Robert Service

Gold fever has struck the Yukon again. Gold cracked US$1,300 an ounce last week, which is great news whether you’re working an old claim on Bonanza Creek, own shares in a company in the hot “White Gold” district south of Dawson, or just have a few bars buried at the cabin that neither the taxman nor your ex-spouse’s divorce lawyer know about.

The 1898 rush started when gold prices were just $20.67 an ounce, a price set by the US government in the 1873 Coinage Act.

It was the heyday of the gold standard around the world, back when the prospect of letting governments print as much paper money as they liked horrified economists and citizens alike.

We’re past that attitude now.

In fact, the steady erosion of the value of paper money is one reason many people like to own gold.

If you put a Canadian dollar in your safe 10 years ago and took it out today, its purchasing power would have eroded more than 20 per cent. Gold, on the other hand, went up over 400 per cent from around $275.

Gold handily outperformed the stock market, even adjusting for the rise in the Canadian dollar in the last 10 years. The main Toronto index, for example, was up just a bit more than 10 per cent over the period.

There are plenty of other reasons to be bullish on gold.

European and American demand for gold jewellery may be flat, but the emerging middle classes of India and China represent a healthy demand. Especially India where using gold for gifts and family savings is a longstanding tradition. And we have to mention that chef in Manila who offers his high-end clientele sushi wrapped in gold, with a sprinkling of diamond dust if it’s a really special occasion.

Gold is also in demand for a wide range of industrial uses, from spiralling numbers of computers and cellphones to making fighter jets resistant to electromagnetic pulse radiation.

The financial crisis has also sparked investor interest in gold.

As the Yukon government can tell you, even highly rated investments in paper securities can have hidden dangers.

Furthermore, the world’s central banks have put extra shifts on the printing presses with their so-called ‘quantitative easing’ policies. This basically involves printing money to buy various kinds of securities to sustain economic growth.

When gold bugs hear this, they think “inflation” and double down on their gold investments.

Finally, there is also booming investor interest in gold.

Large volumes of money are flowing into the gold markets. Secretive hedge funds are said to be making highly leveraged bets on gold prices, and regular investors can get in on the game via a burgeoning number of exchange traded funds.

In the last few years, for example, the Claymore Gold Bullion Trust, ETFS Physical Gold, SPDR Gold Trust, Julius Baer Physical Gold Fund and a host of other investment vehicles have hit the market.

Unfortunately, this all sounds worryingly familiar.

Similar trends preceded both the internet crash and bursting of the housing bubble: surging values, increasing speculative interest, and a growing mania among retail investors.

It makes people recall what highly successful investor Joseph Kennedy did in 1929 when he heard his elevator boy bragging about making a killing in the stock market; he sold immediately.

The other thing about gold is that it doesn’t produce any income.

If you buy bank stock, for example, everyday you have 50,000 cheery bank employees around the country working hard to pay your quarterly dividend. Gold just sits there – alluring and beautiful, but inert.

Before you catch gold fever, you should remember that gold is not automatically a good investment. If you had bought some in 1980 at around $850 during that gold spike, it would have taken till late 2007 to break even. For prolonged periods in the last few decades, gold has been a poor investment.

There are also other ways to hedge against inflation, from buying stocks to investing in inflation-adjusted government bonds.

Of course none of these have the magic of owning a few gold bars of your own. And they aren’t hedges against the collapse of modern capitalism, if you’re planning to keep some at your survivalist compound.

No one really knows where gold prices are going, of course. The gold bugs may be right, and we might see $2,000 an ounce gold in a few months. Or years.

But we should all remember the big lesson of the Klondike Gold Rush: the safest way to make money in 1898 was mining the miners.

Many storekeepers, bartenders and dance hall girls did much better than most of their customers.

It will probably be the same this time. I predict that the gold brokers, hedge fund managers and mining company investment bankers will do quite well out of the gold market. So will a few canny miners who hedge future sales now.

As for the investors paying $1,300 per ounce last week, only time will tell.

Keith Halliday is a Yukon economist and author of the Aurore of the Yukon series of historical children’s

adventure novels.