The Cult of Gold

So here's the link to my interview with Peter Schiff on Tuesday. For those who don't know, Peter Schiff is a financial manager turned radio host. He's famous for having denounced the housing boom of the 2000s as a bubble and for his ultra-hard-money views.

Probably the most interesting part of the interview, should you listen to it, comes in the second half. I make the point that it's unexpected for gold and US Treasuries to rise together—and that one of those price rises is likely to end in tears. I suggest that it is more likely to be gold on grounds that (1) gold is a much smaller market, with fewer players and more easily manipulated and that (2) it's a market much more characterized by the kind of unethical and/or abusive practices we saw, for example, in the subprime market.

I don't deny that inflation risk exists, of course it does. The prudent investor will want to hedge against that risk with a diversified portfolio of hard assets including, for example, real estate, Australian dollar bonds, and investments in commodity-producing stocks ("son, I have one word for you: potash"), that kind of thing. As we move toward recovery, you'll probably want to allocate more of your investment portfolio toward inflation hedges. But gold coins at a 30% markup over melt value? NO!

Schiff challenged me and as he challenged he began to argue—not that the purchasing power of the dollar would decline, but that it would plunge toward worthlessness. (At one point he said that if you buried $1 million in a box today and dug it up 10 years from now, the box would likely be worth more than the cash. That would be some box.) And this is where I begin to think: gold for tragically many small buyers isn't an investment at all; it's a cult.