Talk about Money: Once again, gold captures our interest

Gold doesn’t pay dividends or interest, like some investments.
And, as a recent column by Richard Costa in the Scotts Valley Times points out, gold can be a volatile investment. That’s true.
But gold has been one of the best investments to own over the past 10 years, having soared about 300 percent in a time when the stock market has floundered.
Should you invest in gold? No one knows the future, but we can take some clues from the past.
Gold has been a store of value throughout human history. It is even mentioned in the book of Genesis.
Aside from its beauty, it has many industrial uses. It can be hammered into sheets so thin that light can pass through, and a single ounce can be drawn into a wire 50 miles long.
But the reason its value has risen so much recently is that, once again, it has become a popular way to store wealth.
Throughout history, gold has had periods of extreme popularity as a substitute for paper money. But why? What’s wrong with paper currency?
The problem is that we have a tendency to live beyond our means. Our leaders hold on to power by giving the people the services and projects they want, and they pay for them by cranking up the printing press and churning out more paper money. Deficit spending didn’t start with George W. Bush and Barack Obama.
Sometimes the money printing goes too far, and investors become worried that their paper money will lose buying power — a process known as inflation. So they start moving money into gold. Governments have often linked the value of their money to the price of gold.
That was once the case in the U.S., where the dollar was backed by gold and silver for most of its history. President Nixon abandoned the dollar-gold standard in 1971, when the temptation became too great to overspend on the Vietnam War and the social programs created by President Lyndon Johnson’s Great Society.
The price of gold went up 24-fold in the 1970s, from $35 an ounce at the beginning of the decade to a peak of $850 at the end.
Gold then dropped in value for 20 years. It bottomed at $255 an ounce — a drop of 70 percent from its peak.
Deficit spending began again in earnest under President George W. Bush, and gold began another long uptrend.
Yes, Costa’s column in the Times is right: Gold’s price is volatile. The yellow metal’s price dropped by half during one stretch in the ’70s. But it hasn’t been any more volatile than Silicon Valley stocks.
The Nasdaq skyrocketed 15-fold from 1990 to its peak in 2000, before plunging 80 percent in the next 2½ years.
And in 2008, the worst year in the stock market since 1931, investors who owned gold were happy they did. While the S&P 500 plunged 41 percent during the year, the price of gold rose 7 percent.
Gold’s recent rise has been fueled by our mounting national debt. We’re spending and borrowing at a furious pace. The Federal Reserve says it will raise interest rates when the economy recovers to stop inflation from getting out of hand, but I have my doubts.
Higher interest rates would hurt the value of all the mortgage-backed bonds the U.S. has been accumulating. Higher rates would set back the housing market and consumer spending, killing the economic recovery. So when it comes time for the Fed to slow the flow of easy money, I don’t believe it’ll have the stomach to do it.
As it has throughout history, gold will attract interest from those worried about the value of their paper money.
• Mark Rosenberg is an investment consultant for Financial West Group in Scotts Valley, a member of FINRA and SIPC. E-mail him at [email protected].