An alternative view of the rising gold price

Gold has to keep rising if current buyers are to get any return. Direct investments in gold pay no interest. Some folks buy gold-mining stocks that pay dividends, but those are subject to declines in the companies’ other mining businesses.

People are speculating in gold because the dollar has been falling and they think gold will hold its value. Others buy gold out of fear the money created as the U.S. props up its banking system will lead to inflation. Others want the metal simply because it’s increasing in value.

Gold’s latest boom offers the U.S. government an opportunity to capitalize on the emotions of speculators and sell off its own horde of the metal.

At today’s prices, the Federal Reserve holds about $300 billion in gold. The Fed’s balance sheet values the holding at just $11 billion, but this is based on a price of about $42 a troy ounce, the so-called official U.S. government price established in 1973.

Something Useful

In these times of trillion-dollar budget deficits, $300 billion may not seem like much. Still, that money could pay some of the costs of any health-care bill that comes out of Congress. Or it could help pay for wars in Iraq and Afghanistan.

The U.S. probably would have to sell its gold a bit at a time so it didn’t cause a slump in prices, partially defeating the purpose of the exercise. U.S. holdings account for 27 percent of the gold held as reserves by central banks.

On second thought, speculators are so hungry for gold, selling by the U.S. may not scare them.

The government, of course, seems content to let its gold investment lay in storage. Some economists would be shocked at the idea of getting rid of the country’s stockpile, which they see as backing for the dollar. Do they think China and Japan buy hundreds of billions of dollar-denominated Treasury securities because America owns some gold? They buy because they’re sure the U.S.’s credit is good.

Trade Tool

Gold long ago was used by nations to balance their trade books. When the U.S. bought more abroad than it sold, it paid the difference in gold.

It’s comical to think of that today. Once the U.S. economy gurgles again, the Fed’s $300 billion in gold would only cover about six months of the nation’s trade deficit.

European and Asian companies don’t collect dollars for their goods because they expect a payoff in gold but because they think the currency has its own value.

Neff, 78, still manages money for himself and his family in suburban Philadelphia. “I’m still in the hunt,” he says.

The hunt has never taken the veteran investor anywhere near gold. While the experience has been exhilarating lately, “I’m not attracted to it,” Neff says.

If only others were so sensible.