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Section: Daily Dispatches

4p ET Monday, November 22, 2004

Dear Friend of GATA and Gold:

If the author of this essay in next week's issue of
The New Yorker magazine had put half as much effort
into researching central bank policy -- and finding
the door shut in his face -- as he put into being
snide about gold, he would have been even more
clever than he thinks he is. But maybe it's no
matter; for when gold starts getting mentioned in
The New Yorker, it may not be long until it's on the
cover of Time -- when, of course, it indeed will be
"time," as in time to sell ... if you can figure out
what to sell into.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

Why Gold?

By James Surowiecki
The New Yorker
November 29, 2004

One of the perks of stardom is the indulgence of
unusual requests. Ozzy Osbourne used to require
the presence backstage of an ear, nose, and throat
specialist who could administer B-12 shots. Guns
N' Roses demanded Dom Prignon and Wonder
Bread. For Van Halen, it was a bowl of M&M's --
with all the brown ones removed. Then there was
Bette Midler, who, when she toured Europe in the
late '70s, insisted on being paid not in dollars or
pounds or francs but in gold.

It was a fashionable extravagance. With inflation
devastating the value of national currencies, Western
economies in the dumps, and oil prices soaring
because of tension in the Middle East, anxious
investors had fled to the security that supposedly
only gold could provide. An ounce of gold, at its
peak, in 1980, was worth $850.

That was a long time ago, and, as far as we know,
Usher has yet to pester his promoters for Krugerrands,
but economic worries have recently prompted investors
to start coveting gold again. The weakness of the dollar,
America's enormous trade deficit, and war in the Middle
East have sent the price of gold up 40 percent in the
past two years, and last week it hit a 16-year high of
$445 an ounce.

In the speculative imagination, gold remains the best
hedge against Armageddon.

It also remains a testament to the tenacity of popular
delusion. What is gold, after all? Strictly speaking, it's
a commodity, like oil, steel, or lead, albeit not an
especially useful one. There's a steady but small
demand for gold as an industrial product -- for consumer
electronics, computers, and dental work -- and as
jewelry, particularly in India, which now buys 20 percent
of the world's annual gold output. And there's a steady
supply. Since 1970, world production has nearly
doubled, thanks to mining companies that tear up
mountainsides every year in search of it.

Yet the price of gold has little to do with these two
variables. To true believers -- known as "gold bugs" --
the idea that gold is a commodity is rank heresy. They
prefer to think of gold as the planet's most reliable
currency, a stable, ineradicable source of wealth
whose value will endure no matter what comes to pass.

It's hard to square this faith with what has happened to
the price of gold in the past two decades. It has been a
terrible investment. Even with the recent surge, it's up
0 percent since 1988, while the S&P 500 has almost

Gold's buying power has plummeted too. In 1980 10
ounces of gold would have bought you a nice car. Today
it would get you a nice bike.

The gold bugs have a handy explanation: Gold is a victim
of market manipulation and bad press. Wall Street and
the world's central banks are, apparently, "enemies of
gold," holding gold prices down in order to prop up
people's confidence in the paper-money system. One
gold bug even filed a lawsuit against various government
officials and big banks alleging a conspiracy to sabotage
gold prices with surreptitious sales. Another compared a
skeptical journalist to Joseph Goebbels.

The gold bugs are classic cranks, but their obsession is
rooted in experience; we've all been conditioned -- by
history, by myth, by Mr. T -- to think of gold as money.
James Bond never had to contend with a Nickelfinger,
and Bette Midler would probably not have accepted
payment in palladium or cowrie shells or cattle.

The world's central banks and the International Monetary
Fund still have vaults full of bullion, even though
currencies are no longer backed by gold. Governments
hold on to it as a kind of magic symbol, a way of
reassuring people that their money is real.

So there's a little bit of the gold bug in all of us. Still,
in a world of "swaptions" and strips gold's allure is
increasingly atavistic. The idea of gold as a platonic
currency, universally valuable across time and space,
reflects a basic distrust of markets, a fear that in a
world of paper money wealth is just an illusion. For
gold bugs, paper money turns us all into Wile E.
Coyote -- we're running on air, and we'll plummet
once we look down and realize there's nothing
holding us up. The gold bug's apocalyptic mentality
maintains that someday the global economy will look
down and the result will be chaos. Gold is the only
thing that will still be valuable after the bottom drops

Yet gold is valuable only as long as we collectively
agree that it is. It may be soft, shiny, durable, and
rare, but it has no more intrinsic value than feldspar
or quartz. Just because it has a long history of being
used as money doesn't mean that it has a future. In
the end, our trust in gold is no different from our trust
in a piece of paper with "one dollar" written on it. The
value of a currency is, ultimately, what someone will
give you for it -- whether in food, fuel, assets, or
labor. And that's always and everywhere a subjective
decision. Gold or not, we're always just running on air.
You can't be rich unless everyone else agrees that
you're rich.

Gold investors like to pride themselves on being sober
realists. The irony is that buying gold is the purest form
of speculation. If you invest in a company, you're
investing in machinery, technology, and people. If you
buy steel, you're investing in something that people
need. But if you invest in gold you're basically betting
that someday a greater fool will come along who thinks
gold is worth more than you do. You're buying into a
collective hallucination -- exactly what those dot-com
investors did in the late '90s. One could say that gold
is the biggest, most durable bubble in history.
Someday even this one may pop.


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15018 North Tatum Blvd.
Phoenix, Arizona 85032
Dr. Fred I. Goldstein, Senior Broker



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