Atomic Number 79

Gold is currently trading at about $708 per troy ounce. Back in 2001, it was $300 and peaked earlier this year at $1,002.

The recent pullback (traded @ $918 on 10/9/08) has been attributed to:

- Hedge fund selling. This is the time of year when hedge funds typically allow their fund holders to redeem shares. Since they need to raise cash, the preference is to sell the investments they have realized gains in.

- Dollar rebound. The US dollar has moved higher over the last few weeks. As a result, gold (like any other dollar denominated asset) becomes more expensive in local currency terms if overseas accounts want to buy. Therefore, the price will fall to keep buyers interested.

- Decreasing inflation fears. The US economy is slowing and the global economy is not far behind in experiencing slowing growth. Shipping prices are down, fuel prices are down unemployment is higher: not the breeding ground for higher prices.

So, why am I not convinced that gold should be sold? Aside from its use as an inflation hedge (which, depending on your inflation measure, gold has done a poor job of tracking), gold is purchased as a store of value. In this sense, gold is acquired because it has more scarcity value than fiat currency.

Efficacy aside, the Federal Reserve and US Treasury will be pumping vast amounts of funds into the financial system. They will try to prevent a purging of the system, a deep recession that will decrease the amount of debt and a reversal of the savings rate. Not that it tells you everything, but the stock market is not convinced it will work. The interbank market is not convinced.

Since our currency is not backed by anything, the only value it has is based on relative supply. Our dollar only has value based on how many of them exist and who wants them. With trillions in supply coming, with defaults escalating (which decreases foreign demand), I think the death of gold is exaggerated.