Gold is going through the roof. Record prices for the metal that were once unimaginable are exceeded each new trading day. Look at the chart, and the price line is shooting straight up like a rocket. Over the past five years, the value of gold has increased more than a compounded 150 percent and the end, the true believers are convinced, is not in sight. Why? How does one explain the gold fever that’s driven up the price from $300 or so an ounce just several short years ago to an April price that’s north of a dizzy $1,460?
The answer is fear.
When times are rough, people go for gold. When people are convinced the center will not hold, when Mother Nature rages and politicians rant, nothing is a good as gold. It is the one true thing. If economics is, to twist the old German historian’s shrewd phrase, the continuation of politics by other means, then going for gold is a politics of despair. It is a Big Short on the helter-skelter world we’re living in. Gold fever is a contrarian strategy; one part anxiety, to another part anger at the stupidity of the powers-that-be, to another part wishful thinking.
So when hedge-fund trader John Paulson earned, according to The New York Times, $5 billion last year by buying securities that control a whopping 96 metric tons of gold—that’s more gold than is owned by Australia—he was simply betting that the central banks didn’t have the answers that would get the world’s economies out of the mess they were in. Or when conservative talk-show hosts urge their listeners to invest in gold coins or buy gold bars for their 401(k)s, they are warning people not to put their faith in establishment bankers or a mercurial and manipulated stock market. Rather, they are advising their audience to, as commentator Glenn Beck suggested, take “control of your wealth.” And when the Discovery Channel’s Gold Rush: Alaska, the reality-TV series that depicts a group of down-and-out blue-collar workers who head off to the far north to prospect for gold, becomes the surprise cable hit of the past season, it is tapping into a mind-set that also has been frustrated by the uncertainties of life today. As Todd Hoffman, one of the series’ real-life stars, explained to a reporter, “I’ve been through some troubles…. When you start to dig gold out of the ground, every little piece of gold is a piece of hope….” A common symptom, then, of the gold fever epidemic that’s now raging across the nation is the belief that the country is going to hell in a handbasket.
A small keg of bent nails sold for gold worth the equivalent of $800. Salt was literally worth its weight in gold dust. Eggs were traded for nuggets.
Yet the galvanizing attraction of gold when the going gets tough is nothing new. Back in 1896, when gold was discovered on Bonanza Creek in the Yukon Territory, America was reeling. The Panic of 1893 had turned into a full-blown economic depression. All across the country, banks had failed, railroads had gone into receivership, farms had foreclosed, and jobs had disappeared. Then newspapers headlined the story that the first wave of Klondike prospectors had arrived in Seattle on a steamer with “more than a ton of solid gold aboard.”
The news was electrifying. Throughout the country the time was right for great expectations; people who had nothing to lose were willing to risk all they had. Suddenly, the Klondike loomed as an enchanted land where the prospect of dipping a pan into a cool Yukon stream and finding a fortune of gold dust would be the answered prayer. The stampede to the far north began.
For most, it was a bust. Just like many of the opportunistic gold bugs and would-be prospectors today, they soon discovered that the hope, however fervent, of striking it rich is no substitute for due diligence and expertise. Tens of thousands of people who had never experienced the far north’s penetrating cold or attempted to trudge over a snow-blocked mountain pass when the winds were howling and ice as hard as granite gripped the ground blithely charged to Alaska as winter set in. And not unlike the wave of modern-day enthusiasts who placed their bets only after reading about the easy profits others had reaped, they headed to the gold fields when it was too late—all the rich claims had been staked. Or, again like many of today’s gullible investors, had their high hopes exploited by wily con artists and bunco men.
And spreading hand-in-wringing-hand with the current strand of doomsday, anti-establishment gold fever is the belief that things will only get better, the economy righted and inflation once and for all curtailed, if the nation were to return to the gold standard. The argument, reduced to its talking points, is that “fiat money”—currency pegged to a government’s invented tautologies—should be replaced by a monetary system that is based on something tangible and that has real value, i.e. gold. A free-spending government can print all the money its liberal, inflationary heart desires. However, a Treasury bound by the gold standard would need to have a corresponding pile of gold in its vaults to back up every new dollar running off its presses. The earnest prediction is that this sort of fiscal discipline would rein in galloping prices and help prevent the sort of grandiose speculation that fueled the recent global financial and monetary crisis.
Or would it? Again, the experience in the Yukon gold rush is instructive. During its first winter, Dawson, months earlier just a quiet stretch of frozen swampland near the mouth of the Klondike River, became a tent city that was the richest community in the world. Except no one had any money. All they had was gold; and they had plenty of it.
So gold became the accepted currency. A small keg of bent nails sold for gold worth the equivalent of $800. Salt was literally worth its weight in gold dust. Eggs were traded for nuggets. Poker was played for fantastic pots; piles of nuggets and dust that could easily ransom a king. A round of drinks would wind up costing the price of a house in other parts of the world. Such was the heady cost of living under a true gold standard.
Of course, this bubble burst as the newly minted millionaires cashed in, and the next round of prospectors discovered that their luck had run out. Similarly, it seems reasonable to believe that the current price of gold will not keep climbing. In the long term, pinning all of one’s hopes to gold makes as much sense as a prudent investment strategy as buying a lottery ticket. But then again, as any gold bug will be quick to tell you, some people win.
Howard Blum is the author of the Edgar Award winner American Lightning and a contributing editor at Vanity Fair. His book, THE FLOOR OF HEAVEN: A True Story of the Last Frontier and the Yukon Gold Rush, is out now.