Recent declines in the price of gold, which is off about 17 percent from its peak, show that this price can go down as well
as up. You may consider this an obvious point, but, as an article in The Times on Thursday reports, it has come as a rude shock to many small gold investors,
who imagined that they were buying the safest of all assets.
And thereby hangs a tale. One of the central facts about modern America is that everything is political;
on the right, in particular, people choose their views about everything, from environmental science to gun safety, to suit
their political prejudices. And the remarkable recent rise of “goldbuggism,” in the teeth of all the evidence,
shows that this politicization can influence investments as well as voting.
What do I mean by goldbuggism? Not the
notion that buying gold sometimes makes sense. Gold has been a very good investment since the early 2000s, and it’s
probably not all bubble. One way to think about this is that gold is like a very long-term bond that’s protected from
inflation; and actual long-term inflation-protected bonds have also seen big price increases, reflecting a general perception
that there aren’t enough alternative good investments.
No, being a goldbug means asserting that gold offers
unique security in troubled times; it also means asserting that all would be well if we abolished the Federal Reserve and
returned to the good old gold standard, in which the value of the dollar was fixed in terms of gold and that was that. And
both forms of goldbuggism soared after 2008.
At the same time,
calls for a return to the gold standard proliferated, and not just among marginal figures. Indeed, the 2012 Republican platform effectively demanded a return to gold, calling for a commission to
“investigate possible ways to set a fixed value for the dollar” (which it took as self-evidently desirable), and
making it clear that the preferred route involved a “metallic basis” for the currency.
So the financial
crisis of 2008 brought a surge in gold fever (although that surge has abated a bit since 2011). But why?
After all, historically,
gold has been anything but a safe investment. Sometimes it yields big gains, as it did in the late 1970s and again between
2001 and 2011. But that 1970s run-up was followed by an epic plunge, with the real value of gold falling by more than two-thirds.
modern world’s closest equivalent to the classical gold standard is the euro, which puts European countries back under
more or less the same constraints they faced when gold ruled. It’s true that the European Central Bank can print money
if it chooses to, but individual countries, like nations on the gold standard, can’t. And who would hold up these countries’
recent experience as an example of something we’d like to emulate?
bet on it. In modern America, as I suggested at the beginning, everything is political; and goldbuggism, which fits so perfectly
with common political prejudices, will probably continue to flourish no matter how wrong it proves." (http://www.nytimes.com/2013/04/12/opinion/krugman-lust-for-gold.html)