The gold market meltdown — with prices plunging in recent weeks from over $1, healing 900 an ounce to under $1, seek 600 — is a reminder that the precious metal is a volatile, speculative commodity. It also signals a bear market in credibility for the many right-leaning cable-news and talk-radio hosts who have touted gold relentlessly in recent years as a hedge against economic calamity.
“If you’ve been watching for any length of time, and you still haven’t looked into buying gold, what’s wrong with you?” Glenn Beck said in a video on his website in 2009. “I think you’re nuts.” His TV show, meanwhile, featured frequent calls to buy gold, interspersed with commercials for gold retailers.
Bill O’Reilly, Mark Levin, Andrew Napolitano, G. Gordon Liddy and other high-profile hosts also joined the gold bandwagon, pressing audiences to invest in gold collectible coins and other such products rather than trust their wealth to paper money. Liddy took to crumpling currency in his gold commercials.
Lately, as gold has fallen and the dollar has risen amid economic turmoil, some of the metal’s vulnerabilities as an asset have come to the fore. One is that gold prices can be vulnerable to declines in other asset classes, as gold-holding institutions and individuals may need to sell it to cover their losses in stocks or other markets. Another is that gold, often purchased as a hedge against inflation (a role it performs unevenly), can be caught in the downdraft of economic stagnation that threatens to keep inflation low or spur deflation.
A further source of volatility for gold is that — though the metal is often presented as a means of independence from untrustworthy governments and central banks — those official institutions hold enormous quantities of gold and can affect the market through actions or perceptions. Wikileaks recently released a U.S. Embassy cable suggesting that China is increasing its gold reserves to promote alternatives to the dollar as international reserve currency. Whether or not that is true, it raises the question of whether gold might fall further without support from Chinese purchases.
Often, advocates of gold as an investment have also been enthusiasts of putting the dollar back on a gold standard. Such a policy regime would have numerous problems, including instabilities in gold supply and demand, and maintaining the credibility of the gold standard in the face of a global market constantly testing the commitment of policymakers to maintaining the standard. One good consequence of gold’s current market turmoil is that it makes a gold standard restoration even more implausible.