April 17, 2008: 5:36 AM EDT
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The appeal of gold (cont. p.2)

By Elizabeth Spiers, contributor

At the extreme end, the hard-core survivalists stock up on Meals Ready to Eat (MREs) and firearms, pick up an extra brick of ammunition every time they go to Wal-Mart (WMT, Fortune 500), learn to grind their own grains, and are so well versed in the art of repurposing everyday items that they could probably fashion indestructible underground bunkers from a couple of rolls of duct tape, some old culverts, and a few pieces of chewing gum. (As with any subculture, they also have their own in-jokes. Q: How do you know you're a survivalist? A: You have emergency rations for your pets and view your pets as potential emergency rations.)

The end of the world (as we know it)

All the hard-core survivalist's "preps," as they're called, are designed to help the practitioner cope with The End of the World As We Know It, or TEOTWAWKI, in survivalist parlance. (Or, alternatively, SHTF, which means what you think it means.)

Naturally, a favorite TEOTWAWKI scenario is total economic collapse. Dollars are worthless. Central banking has failed, and currency isn't worth the paper it's printed on. To most people, that seems extreme, but tell a hard-core survivalist that it never happens and he'll pull out a map and point to Argentina.

The hard-core survivalists, however, share some overlap with the moderates in that the value of the dollar is a perpetual concern. The moderates would point out that while the dollar is unlikely to fall into total worthlessness, it's getting a bit more worthless day by day. That is of particular importance to those who envision TEOTWAWKI not necessarily as a single event-driven meltdown - e.g., a nuclear attack. They are more likely to fear a slow but inevitable crumbling of social infrastructure and economic systems.

To guard against this possibility, both groups buy gold on the assumption that gold is a store of value. Conventional wisdom holds that an ounce of gold can generally buy the same goods over time regardless of how expensive things get, making it a good hedge against inflation. And it naturally follows that many survivalists think inflation wouldn't be as likely a problem in the first place if the dollar were still pegged to the price of gold, as it was until it was unilaterally uncoupled by executive order in 1971.

This particular rationale is one supported by the "goldbugs," who are perhaps best embodied by the fictional seen-it-all market veteran Lou Mannheim in Oliver Stone's Wall Street, who says with characteristic pessimism, "The country's goin' to hell faster than when that son of a bitch Roosevelt was in charge... the worst mistake we ever made was letting Nixon get off the gold standard."

A political restraint

If Mannheim were real, he'd probably be a Libertarian and a supporter of Ron Paul, who in his campaign for President has been very much concerned that a fiat money system makes it easier for the government to engage in war because it increases the ease of financing foreign conflicts. If the government didn't have enough cash to fund an invasion, it would simply print more. In this sense, gold is thought of as not merely an economic hedge, but a political restraint as well.

All this would seem to make gold an attractive long-term investment. Is it? Well, it depends on what you mean by "investment."

Speculators who bought gold at its peak in 1980 and sold at the low in 2000 lost 70% on their investment. (For comparison, the Dow went up 1,113%.) If you were a survivalist during that period, you might argue that those losses were irrelevant, because when dollars are worth nothing, gold at $280 an ounce will look good. But if short-term gains or losses are relevant, gold can easily be a bad place to put your money.

Investment advisors have long suggested that gold in small doses helps protect an overall portfolio. It tends to move independently of other asset classes, and unlike any type of security, it doesn't run the risk of going to absolute zero. And if we look at it in the very, very long term - the past 100 years - returns have closely matched the rate of inflation. As long as you don't buy out of anxiety-driven speculation, the kind that drove gold to its peak in 1980, it's generally considered a conservative investment.

Anxiety-driven speculation, however, should not be taken lightly. Even the most amateur investors understand buying low and selling high. With gold at another all-time high, would it really make any sense to buy it at the current level of more than $900 per ounce? The answer seems obvious: only if you think it's going to go significantly higher on a speculative basis. And while demand can vary greatly depending on how the speculators or the survivalists (or the survivalist speculators) feel about it on any given day, supply is largely fixed.

Pricing is driven by demand

If demand rises, a few more people will go panning for gold in California creeks, but major new mines don't pop up overnight. Pricing is driven almost entirely by demand, and demand, if historical patterns are any indication, seems to be positively correlated with fearful economic and political climates.

So if you're interested in speculating, I suppose you could start your regression analysis on domestic MRE purchases as a leading indicator of where gold prices are going. But I don't recommend speculating unless you're a professional speculator - and usually not even then.

It's better to do what the moderate survivalists do: look at the people at the extreme end of the spectrum and pick, la carte, the proper strategies that best suit your situation. Investing in gold as a small hedge against inflation while expecting a very, very long-term real return of 1.2% a year, plus storing some canned goods and water and looking at alternative energy sources, is very different from moving all potentially vulnerable assets into gold, acquiring a small armory full of munitions, enough food to feed your family for three years, and a wardrobe full of hazmat suits.

For what it's worth, even the hard-core survivalists who believe heavily in gold investments as both a hedge and an alternative currency understand that nothing totally protects against economic uncertainty. They acknowledge that when the SHTF, and TEOTWAWKI happens, there's still the problem of protecting your gold reserves, which could always be confiscated by people with guns or prohibited by whatever's left of the government. They might then note that fictional goldbug Lou Mannheim's second-least-favorite President, F.D.R., did exactly that in 1933.

You can't hedge against everything. To top of page

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