DECEMBER 10, 2009, 1:47 P.M. ET.
Gold Trades on Luster and Bluster .
By LIAM DENNING
Imagine that all mining of gold ceased tomorrow. The gold price would spike initially. Miscreants might ransack neighborhood church altars. Suitors of "single ladies" heeding singer Beyoncé's exhortation to "put a ring on it" would bankrupt themselves.
Then what? Apart from bars going up on stained-glass windows and a sudden outbreak of bachelorhood, civilization would survive. You can't eat, drink or burn gold. The story of King Midas is, after all, a cautionary tale, not an ode to bling.
Yet the argument that the world's output of gold has peaked is being deployed to justify another leg up in prices from today's $1,131 an ounce. Barrick Gold Chief Executive Aaron Regent reckons“peak gold”may already be upon us; although it's worth remembering his company has just unwound its hedges, leaving profits more levered to rising prices.
Bloomberg News Unlike oil or food, however, gold isn't consumed. Virtually all gold ever mined remains extant. Some 86% of those 5.24 billion ounces rests in vaults or on people's bodies, according to the World Gold Council. Genuine shortages look unlikely. And high prices have an effect. Demand for gold jewelry, which accounts for about half of overall demand, fell 30% year-on-year in the third quarter.
Declining production, therefore, might offer some support to prices, but not necessarily at today's level, as it becomes clear that demand is being rationed and the supply overhang in the form of physical stocks remains high. When mine output stagnated between 1992 and 1996, the spot gold price rose by all of 4% to $368 an ounce.
Above all, phrases like "peak gold” should trip alarms. Investors buying into similar arguments at the height of the energy bull markets suffered big losses as recession hit and supplies turned out to be ample. And those commodities really get used up, rather than merely stored in the hope someone else pays more for them later.
Another bull argument, recalling the days of the gold standard, observes that the money supply has expanded far faster than gold reserves. Yet even if proponents could agree on the metrics to be used—narrow or broad money? official reserves? global stocks?—the argument hasn't held over time. Gold was range-bound after the early 1980s bubble until the middle of this decade, even as U.S. money supply expanded, and has displayed little correlation with movements in broad money-supply measures. Lately, it has even disconnected from measures of observed and anticipated inflation.
The gold price's reaction to recent events like the unexpected drop in the U.S. unemployment rate and worries about Dubai and Greece is more telling. Gold has dropped at even the slightest foreshadowing of monetary-policy tightening or signs the financial system faces another bout of fragility. Its correlation with the S&P 500 has leapt from about zero in May to more than 40%. For all the talk of fundamentals and being a safe haven, gold is behaving more like the risk assets against which it is supposed to offer diversification.
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