Gold flirting with record price

At $1,024.28 an ounce, gold prices are again bumping up against the record $1,032.70 an ounce that they hit in March 2008.

Nobody really knows why gold prices are going up. After all, there are two markets for gold -- people who actually use it and people who invest in it. And comprehensive data on supply and demand in these markets is scarce.

The people who use gold for things like jewelry are selling gold as the price tops $1,000 -- scrap supplies will jump 22 percent to a record 1,485 tons this year. The weak economy, which has sliced $13.9 trillion from investor wealth, is driving people to sell that gold to pay for day-to-day living expenses.

And then there are the investors, whose movements are shrouded in mystery. For them, any hint of rising inflation -- such as yesterday's CPI report which showed core inflation at a tepid 1.4 percent -- is an excuse to exhort others to buy. There are anecdotal reports that ETF buyers, such as the SPDR Gold Trust, are piling into bullion to a near-record 1,086.48 tons.

In some ways, buying gold is a bet against the health of the American economy. It's a wager on a weak dollar, booming inflation, ever higher borrowing and global instability. Perhaps those on the lunatic fringe who say that the only hope for America is a bomb attack in a major U.S. city are gold bugs.

Out of control inflation is one scenario that could move stock prices (see my piece here). While gold investors would certainly profit from it, I think it would come at the cost of significant pain to most Americans. How so? Gold prices rise on fear of bad things happening -- such as inflation, terrorism, and a general erosion of confidence in government.

But I also think that the gold "smart money" may be taking its cue from people like Mark Murado, whom Bloomberg quotes as saying: "Everybody is interested in buying gold now, so I'm going to be selling every day when the price is above $1,000."

Peter Cohan is amanagement consultant, Babson professor and author of eight books including, You Can't Order Change. Follow him on Twitter. He has no financial interest in the securities mentioned.

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