Has gold lost its glitter for good? The debate rages, and it affects everyone from miners in Johannesburg to traders in New York. Some financial analysts are promoting a “new paradigm,” which relegates gold to a stodgy, old economic order. By this thinking, gold’s traditional role as a hedge against bad times has been overtaken by more sophisticated financial tools. These range from the relatively simple, like inflation-indexed Treasury bills, to mind-numbingly complex derivatives. “We live in a different world,” says Peter Ward, senior mining analyst for Lehman Brothers in New York. Gold, he says, is experiencing “reverse alchemy” and becoming just another commodity, a bit like pork bellies.
Baloney, squeal gold’s defenders. They predict that when inflation surges or U.S. markets tumble, as many believe they will, gold will again prove its value. Why? Because gold, unlike paper money, is nobody else’s liability. The World Gold Council, a trade group representing mining companies, has run large ad campaigns reminding investors of other times in history when people got lightheaded. Like the “tulipmania” of the 17th-century Netherlands, when a single bulb “could buy the best house in Amsterdam.”
If gold’s critics and defenders can agree on anything, it’s that investors take note when governments sell their treasure. Britain’s auction last week, its first gold sales since 1971, spurred the latest fall in prices. But Australia, Argentina, Canada, Belgium and the Netherlands have also sold significant amounts in recent years, presumably because they can get better returns on other investments. The Swiss intend to sell half of their holdings, or 1,300 metric tons, and the International Monetary Fund has proposed selling up to 300 metric tons. (That plan may be scrapped, in part because it could hurt needy countries that rely on gold exports.) Some investors see a trend emerging. “When you fear a stampede for the exit,” London’s Evening Standard observed last week, “it’s as well to get there ahead of the crowd.”
Gold miners, particularly those in the developing world, have nowhere to run. “I don’t know anything about gold prices,” says Sam Cosa, a 43-year-old miner in South Africa. “All I know is how to take gold from a rock.” These days, it’s a very tough way to make a living, much less strike it rich.
