It’s the Second Gold Rush as People Seek Safe Place for Money

From the Financial Times:

Fears that the US Treasury’s bail-out plan could fail provided support for the gold market, which saw holdings by the main gold exchange traded funds rise to record levels as investors sought a safe haven from the turmoil in financial markets.

On Thursday, the US government was forced to “temporarily” suspend sales of the American Buffalo one-ounce bullion coin after a rush by retail investors depleted stocks.

European central banks have cut their sales of gold to the lowest level in almost a decade, reversing the practice of recent years when hefty sales helped depress prices.

As central banks sell less, investors are rushing into bullion-backed exchange traded funds to such an extent that some analysts refer to the ETFs as the “people’s central bank” because they are now bigger than most countries’ official reserves.

That last sentence caught me off guard.
Central banks are effectively peddling gold derivatives (ETFs) instead of the metal itself. People are hyping up a market around something that doesn’t actually contain value, only the promise of value. Isn’t that the same behavior that got us into this mess in the first place?

I await the next Gold crisis, where derivatives of gold stock associated with banks that do not actually contain a gold reserve are sold inside of gold hedge funds. A few people get rich, but the funds eventually default, leading us to lose trust in banks’ abilities to sell gold.

There will be a run on gold holdings and a resultant spike in gold traded on Internet websites, sold on eBay, or bartered on Craigslist. Internet applications will thus absorb the entire function of the market, leading to an increasingly subtle and diffuse economy.

I’m writing this post at 2:45 am. I need to go to bed.

  • Ryan

    In my view gold is almost always a terrible investment. Here’s why: investment is all about putting money to work to produce wealth. Gold is not a productive vehicle. It just sits there. Well run corporations are productive vehicles. Gold never created a single technological innovation. Corporations have created computers, brilliant software, vehicles that fly across the world, etc. At the end of the day, over the long haul, the best investment is always going to be in the well run corporation.

  • John

    I agree with the first commenter, but you missed the metal’s purpose (as did the droves buying ETFs). Gold is not an investment, it is a storage vehicle. Once you are literally sitting on a pile of metal, no bear can take it from you. Your only risk is a guy with a mask and a gun.

    Investment, on the contrary, is putting forth risk for the hope of making a gain. You could earn enough to eat in retirement or to retire in Tahiti. Then again, you could lose it all. People are buying gold (metal) to reduce the chance of the latter. People buying ETFs only think they are.

  • I think your prediction is right on. I can also remember when all of those people lost money on their gold investment.
    This why a lot of advisers recommend people who do not have the stomach to invest really high not to go into gold.


  • Great article. Gold just keeps going up and up.

  • pease

    Are self-found, gold nuggets, flakes, and dust, worth holding? Should they be sold for less than oz. price to be refined? I guess what I’m asking; could native gold be used as accurate currency, in desperate times?