How a Little Piece of Rock Could Turn the Global Economy Upside Down

Little Piece of Rock Could Turn the Global EconomyIt is not usually a good idea to try and catch a falling piano.

So much change is in the air: the stock market breakout, declining commodity prices, and a world awash in cash.

Thinking about gold, it is just a piece of soft rock. But it’s a rock with a special connotation and with unique properties. It did a fantastic job helping the space shuttle, and a lot of people think it looks pretty good.

The first gold jewelry-makers must have been jumping for joy when they found a shiny rock they could shape without breaking. I read that approximately just 10% of gold production is used in industry; the rest is for jewelry and physical investment.

Because people throughout the centuries attributed value to gold, the soft rock has some worth.

Today, gold prices are determined by derivative traders, central banks, and what barterers believe it to be worth. This is not a group of market-makers that inspires confidence.

I certainly see a role for a little gold as part of an overall portfolio. It has always been a diversification, fear, and inflation-related hedging tool.

With lower gold prices, gold miners are struggling on the stock market. Even the best-quality, fastest-growing gold miners can’t get their stocks to move.

This is the inherent difficulty with resource stocks, and it will never change.

Predicting gold prices is a crapshoot. For the most part, it seems to me that gold prices just trade off their near-term directional momentum, save for a shock. Figures on the supply and demand of the commodity seem to play a lesser role in its price determination compared to other commodities, like oil, for example. (See “A Top Stock with Increasing Dividends and Record Profits.”)

The value attributed to gold by financial market participants offers little reliability. Making investments on an underlying commodity that is referred to as not only a store of value, but also a gauge of fear, is only about the current price momentum. That’s why the herd mentality in gold prices is so powerful.

I have no idea where gold prices are going. Last year, I thought that gold’s price momentum would resume, but clearly, this was not the case. Regardless of what happens to the value of this commodity, it really is just an asset for the sidelines of a portfolio.

The last time there was a spectacular bull market in U.S. dollar gold was in the late 1970s. After gold prices collapsed in the 1980s, another bull market ensued. That bull market was in the stock market.