Gold's 'magic' circle

What is gold?

Coin collectors likely consider that question a stupid one. Whether it’s the precious metal itself or the coins made from it, there is a great familiarity with it.

However, with the precious metal sliding under $1,300 again this morning, it becomes important to analyze what buyers think the precious metal is.

Unlike collectors, who value coins made of gold for their own sake, the rest of the world tends to view gold as a barometer that like a real barometer gives warning of the approach of storms – in gold’s case these storms are of an economic kind.

Because job growth in the United States was reported this morning to be surprisingly strong in October, the metal has sold off a bit. This news, of course, causes most people to celebrate being a sign that perhaps the American economy can once again become more vibrant.

However, because gold is considered to be a refuge from bad times, the news that perhaps good times are on the way is a negative.

Gold is also considered to be a hedge against inflation.

Looking a bit further ahead, higher employment and a growing economy can stoke the fires of inflation as more workers can earn higher wages and more companies can raise prices as more of the goods and services are demanded.

But the expectations of higher inflation are currently trumped by the Federal Reserve’s policy of quantitative easing. It is buying $85 billion of bonds each month, or $1 trillion 20 billion a year. It does this with money created out of thin air.

This is inflationary, right?

Yes, but the reason for the bond purchases is high unemployment. If it is likely to decline in the future, the Fed no longer needs to buy the bonds. The withdrawal of the bond buying reduces cash in the financial system and the price of money – interest rates – rises.

That’s anti-inflationary and bad for gold as an inflation hedge.

So what is gold besides an object that appears to make us think in circles?

Supply your answer here. Email me at david.harper@fwmedia.com.

Buzz blogger Dave Harper is winner of the 2013 Numismatic Literary Guild Award for Best Blog and is editor of the weekly newspaper "Numismatic News."

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