After a big decade, gold bulls still see big things ahead for the yellow metal. Whether the target is $1,500, $2,000, or $10,000, the message is clear: It's still a good time to be buying gold.
I remain unconvinced though, and I think when we take a closer look at what gold is -- and, more importantly, what it isn't -- we can uncover why you can feel OK skirting the hoopla around gold.
Gold the commodity
I won't spend much time with this because this is already a well-worn point. Commodities are valuable because they are useful. Oil propels our cars, steel forms the skeletons of our skyscrapers, and coffee makes Monday mornings tolerable.
And because many commodities are in almost constant demand, blips in supply or demand can send prices shooting up. We just saw this last week when the U.S. Department of Agriculture announced the lower-than-expected corn crop, sending the price of corn up along with seed and fertilizer producers like Monsanto (NYSE: MON ) and Mosaic (NYSE: MOS ) .
Gold doesn't fit this mold. The metal is used widely for jewelry, but the industrial and everyday consumer uses are minimal. But like I said, this isn't exactly breaking news.
Gold as a currency
Among people "in the know" when it comes to gold you'll more often hear talk about gold as a currency. They'll talk about the lack of value in fiat paper currencies and point to government policy as a reason why you can always expect your paper money to lose value over time. Gold, on the other hand, is a rock-solid store of value that you can count on.
Though gold isn't actually used as a currency anywhere currently, I'll let that sentiment stand. Long-term inflation in the dollar is a reality and a saver would actually be pretty disappointed if he or she simply kept their retirement nest egg in cash.
But here's the problem: If we were to say that gold is ideal as a replacement currency, what we'd want to see is that it maintains a stable purchasing power for common goods that a consumer might buy. The U.S. consumer price index tracks the prices of a basket of consumer goods -- food, housing, clothes, medical care, education, etc. If the currency argument on gold were true, we'd expect that the ratio of the price of gold to that index would remain relatively constant as gold maintained a steady purchasing power over that basket of goods. We haven't exactly seen that.
Source: Kitco and the U.S. Bureau of Labor Statistics.
We could also look at many individual products and get a similar view.
Source: Kitco, The National Cotton Council of America, United States Department of Agriculture, University of Wisconsin-Madison, U.S. Department of the Interior, MetalPrices.com.
Now it's notable that the charts for oil and some metals like iron ore show a ratio close to the long-term median. But given the supply and demand concerns associated with oil and some industrial metals, there's an argument to be made that the price of those commodities should actually be climbing in gold terms.
Plus, if we're really going to say that gold is a currency, should its price track certain industrial metals or the goods and services that we use on a daily basis?
Will the real gold please stand up?
So if gold isn't really a commodity or a currency then what is it? It's a fear gauge. When investors are feeling fearful about the future, they turn to gold.
Unfortunately, it hasn't been all that long since we left the Bretton Woods system, so we don't have a wealth of worthwhile information on gold prices. But the last time gold prices spiked was back from the late 1970s into 1980 -- a time not only of inflation, but of serious concern over the U.S.' economic future. We then had a prolonged period of relatively smooth economic sailing, and over that period the price of gold languished because investors simply didn't think they had anything to be afraid of. In fact, that period was so smooth that it engendered the phrase "The Great Moderation."
But now fear is back in a big way. Investors are very concerned about the future, and gold is spiking once again.
So, do we or don't we?
I don't pretend to know how long the spike in gold prices is going to last, but what I do know is that the best time to buy an investment asset is when it's underpriced. Go back up and glance at the charts above. In the late 1990s and early 2000s, the ratio of gold to all of those goods was below the long-term median. Nobody really cared then though because gold didn't have a decade of stellar returns behind it -- it had a decade of losses and stocks were flying high.
Today it's a very different story. Gold's been the hot spot and stocks have languished. There's no shortage of pundits pointing to the past decade as proof that long-term stock investing is dead. Meanwhile, gold bulls slap up charts of gold's price shooting up and to the right and are dead set that the good times will keep on rolling.
On the other hand, I'm happy to hear that "experts" are shying away from stocks. That allows me to continue to find solid, dividend-paying, blue-chip bargains such as Kimberly-Clark (NYSE: KMB ) and Abbott Laboratories (NYSE: ABT ) . Both stocks currently pay a dividend greater than 3%, have a forward price-to-earnings below 14, and are backed by strong, successful companies.
But I want to hear what you think. Have I missed something when it comes to gold? Head down to the comments section and sound off.
All of this government spending is going to have to come from somewhere and Warren Buffett thinks he knows the best place to get it from.