Gold hits record high? Hardly

You've got to hand it to the gold bugs. The often goofy, sometimes kooky, doom-and-gloom, build-a-bunker-in-Montana crowd is laughing all the way to Fort Knox.

The precious metal hit another so-called record high Wednesday of nearly $1,050 an ounce. It's usually folly to buy any asset when it's at its most expensive (recall that the idea is to "buy low"), but gold is one of the few investments out there where you can make a compelling case on a fundamental basis.

Unlike stocks, which are trading more on technicals or momentum or just wishful thinking, gold has a great global macroeconomic tailwind at its back. The practically useless metal (for goodness sake, zinc has more industrial utility) is a macro indicator, says Nicholas Brooks, head of research and investment strategy at ETF Securities, and the macro picture is pushing big pools of institutional money into gold.
For a quick and simplified primer, gold is denominated in dollars, so when the greenback falls the price of gold goes up. And, as we've said before, as long as the Fed continues to print money through a zero-interest-rate policy and so-called quantitative easing, the U.S. continues to run a big trade deficit, and other nations move their foreign exchange reserves out of dollars, the buck has no place to go but down.

But wait, there's more. Gold is also a classic hedge against inflation. No one is much worried about inflation today, but there's a very real and wise concern that all this liquidity will bullwhip right back in our faces when the global economy picks up.

Take the two together -- weak dollar and inflation fears -- and plenty of institutional players are looking to diversify their holdings. "We see large institutional clients in Europe who never looked at gold or commodities before, and now they are actually quite concerned with what the U.S. is doing and they want to hedge against that risk," Brooks says.

In other words, it's not the small army of gold nuts who are pushing up the price of gold. If you are a big foreign pension fund, hedge fund, mutual fund or sovereign wealth fund holding a bunch of U.S. dollars, it's clearly a good idea to pare back on your greenbacks and invest in something else -- like gold.

Now no one is going to dump all their dollars and go entirely into gold, Brooks says, but there's still a lot of potential demand. Pension funds, he notes, move very slowly. There are all sorts of committees and approval processes to go through before investment decisions get made. Indeed, it took one pension fund Brooks knows nearly a year to finally rubber stamp the idea of getting into gold.

"My sense is this is only the beginning [of increased demand for gold] because these big funds move very slowly," says Brooks.

Finally, there is a psychological case to be made for gold having more upside -- way more upside.

Sorry to burst the headline bubble, but gold is not -- repeat, not -- at a record high. It's an inflation hedge, for crying out loud. Talking about gold prices without factoring in inflation is like doing Newtonian physics without applying the law of gravity.

Anyway, gold hit its real all-time high back in 1980 at $850 an ounce. That's $2,225 in today's money. The world was a very different place back then, Brooks cautions, so direct comparisons aren't all that useful. But that level is up there. It is a significant mental and market benchmark.

And there are folks trading gold who can use it to say we have at least another thousand bucks an ounce to go.
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