This article first appeared in the St. Louis Beacon, March 24, 2009 - With gold prices surpassing $900 an ounce in recent months, the local airwaves have been saturated with ads for buying and selling the precious metal.
There are mail-in-your-gold-for-cash commercials, spots for local jewelers and coin dealers, as well as national gold buying teams who set up shop in local hotels.
Steve Hinson, associate professor of economics at Webster University, said that in economic uncertainty, investors historically turn to gold as a safe harbor and a hedge against inflation.
"What's driving the behavior now is similar, although we don't have any inflation, obviously, and our biggest concern right now might actually be deflation,'' Hinson said. "But I think people are concerned about the size of the [national] debt, and the Chinese have been expressing concerns about the value of U.S. Treasury bonds.''
The worry, Hinson said, is that at some point down the road the United States will have to monetize debt -- to print money to finance the national debt, which has passed the $11 trillion mark.
"The reason people are buying gold now is concern about the long-term value of the U.S. dollar, and that's related to the [national] debt -- that they're afraid that at some point foreigners will stop buying U.S. debt,'' Hinson said.
Hinson points out that the last time gold prices reached today's levels was 1980, which he believes makes it a lousy long-term investment.
"In 1980, gold peaked at $850. So, basically, the price of gold is almost what it was 30 years ago. As a long-term investment, there is almost nothing worse,'' he said. "The reason it got so high in 1980 was because of inflation. The dollar was losing value and people became concerned so they started buying gold as an alternative way of holding wealth.''
Hinson said that he knows some "sophisticated" investors poised to buy gold. He doesn't share their interest because he doesn't believe the price of gold will continue to rise -- or that inflation is on the horizon.
Hinson points out that the enticement of gold remains its scarcity.
'It is really, really, really rare. That's why people use it as money," he said. "The only thing that gives money value is its scarcity. If you could just print money anytime you wanted it, it would obviously be worthless."
