When in doubt, buy gold. That seems to be the informed, or at least inspired decision of the moment. The precious metal today danced about $460 an ounce–the highest since 1988. Year to date, gold’s up 4.6%, making it one of the better performers among asset classes (assuming you think of gold as a separate asset class, which some clearly do).

What’s driving gold higher? The same age-old fear that’s been behind most price surges in the precious metal: the fear that the paper alternative of money will be less than the government promises in the years ahead.
Speaking of promises, there were some big ones last night when President Bush pledged to spend heaps of money to rebuild the Gulf Coast economies devastated by Hurricane Katrina. “Federal funds will cover the great majority of the costs of repairing public infrastructure in the disaster zone, from roads and bridges to schools and water systems,” he said, via CNN.
The Economist, reacting to the speech, observes that the President “seems to have turned…into something resembling a big-government Democrat.” That’s a thinly veiled reference to a President who’s not shy about opening the government’s coffers. That, in turn, inspires the gold bugs to buy up more of their precious metal on the belief that government spending for Katrina, Iraq, and all the rest will push inflation higher.
Adding high energy prices to mix is said by some to add up to the perfect inflationary storm. There’s something to this. As we’ve written in recent days, the inflationary effects of elevated oil and gasoline prices are a clear and present danger for consumer and wholesale prices. Gold traders think no less. Yes, some hold out the hope that energy prices will eventually retreat. But so far, that hope’s proven elusive. “People are also starting to worry about the inflationary impact of the higher oil price and that is putting the focus on gold again,” Sandy McGregor, director of Allan Gray Ltd., South Africa’s largest privately owned money manager, tells Bloomberg News today. In the same story, James Moore, an analyst at BullionDesk.com, observes that all the gold buying of late is inflationary hedging. “Most people in the market won’t have seen prices this high. All the ingredients are right for gold to move higher.”
Some analysts are now looking at the $500 mark for gold prices, saying the recent momentum will carry the metal there in the foreseeable future. “Gold is really looking good now and seems to have a clear upside objective,” Mark Keenan, fund manager at UK-based MPC Commodity Fund, tells Reuters.
Support for such thinking comes anew from the bond market, where the yield on the 10-year Treasury Note continues to rise, settling in today’s session at 4.26%, the highest in a month. Meanwhile, the latest bout of inflation jitters gives new incentive for the gold bugs to pronounce once again that the economic chickens are coming home to roost. Consider today’s missive from Euro Pacific Capital’s Peter Schiff, who argues that the metal’s price surge of late is a warning sign of no trivial import. “As the price of gold tends to rise in inflationary periods, economists should ask themselves if they believe the government or gold. History and recent anecdotal evidence certainly favor gold.”
Whatever comes, today’s news on what Joe Sixpack is thinking throw cold water in the face of the economic optimists. The University of Michigan’s mid-month report on consumer sentiment for September dropped like a rock from August. No surprise, perhaps, given the fallout from Katrina. But repairing Joe’s outlook may be no less important than repairing the damaged infrastructure in the Gulf region.
But Joe’s loaded up with debt, and looking at higher costs tied to energy. Can he be inspired to keep spending? To keep America’s “bubble economy” going, as Schiff puts it, “politicians must keep consumers borrowing and spending. By transferring wealth from creditors to debtors, inflation helps make this possible.” That’ll play right into the hands of the gold bugs. Maintaining fiscal and monetary sanity, on the other hand, may finally convince Joe to steer clear of the malls.
The proverbial rock and the hard place once again promise to be a topic of discussion in the coming week.