The Best Argument to Own Gold

True, the yellow metal has risen sharply and maybe irrationally, but the "safe haven" investments are looking ever more dubious, writes MoneyShow.com personal finance expert Terry Savage.

The speculators have now learned that all that glitters isn’t gold—or silver. Gold futures dropped 5.8% on Friday, and silver plunged 18%.

Gold closed at $1638, down from the all-time intraday high of slightly over $1,900 just two weeks ago. Silver settled just above $30 per ounce.

Is this the end of the line for the precious metals? Not by a long shot. But it could be an expensive derailment for those who bought on margin. Or for those who received margin calls on other investments, and needed to sell their profitable gold positions to raise cash.

Last week’s market action in the precious metals serves as a reminder that no market is a one-way street. The term “safe haven” as applied to gold means only that it is “safe” when there is a total loss of confidence in all paper money.

And to include silver in the category of “precious metal” is to forget that it also has industrial uses as a significant part of its demand. In an economic slowdown, a decline in industrial demand adds pain on the downside—one reason this column has long focused primarily on gold.

Why Gold?
This discussion about gold is not about trading or market timing. In fact, every time gold has been mentioned here—starting at well under $500 an ounce—the argument for gold has been as a long-term “hedge” against paper currencies.

But all trading markets swing to extremes—based on emotion, and on a rational analysis of the situation. The bears on gold prices have several good, immediate, arguments:

• Recession: If there’s a recession, with continuing finan! cial fai lures and defaults, there’s little chance of immediate inflation. So why own gold?
• Capital Needs: Investors ranging from European banks to hedge-fund managers may be forced to liquidate profitable gold positions to raise cash for liquidity purposes. They may regret parting with their gold assets—but they have no choice.
• Sentiment: There is nothing more negative than a dream that is dashed. Two years ago, most investors wouldn’t have known the daily price of gold, or cared if it declined. In fact, gold dropped 25% in the fall of 2008—from over $1,000 an ounce to about $750 an ounce. It never made headlines, because everyone was worried about the financial system collapse. Now that gold has become more popular, every decline makes headlines.