Why the Drop in the Gold Price is Good (for most of usS)
Gold is not an investment, but an insurance policy against the collapse of the dollar. The dollar isn’t going to collapse, despite America’s need to borrow nearly half a trillion dollars a year overseas. That’s because our trade deficit is shrinking, from 6% of GDP in 2006 to 3% today; it well may be a trade surplus by 2020 due to the energy boom. If you have a current account surplus, you can finance a big government deficit for a long time–just look at Japan. The bad news is that the economy is still very weak. The good news is that we can paper over the deficits resulting from a weak economy for the foreseeable future. The price of insurance against dollar doom has fallen. That’s good (don’t you want the cost of your life insurance to fall? The last thing you want is for your life insurance policy to pay out).
The ferocity of the April gold price plunge, to be sure, probably has to do with fears that Cyprus as well as other cash-strapped sovereigns will be selling gold. That’s bad (for them) but doesn’t affect the rest of us too much.
Gold has a place in the portfolio as a disaster hedge. Just because disasters are less likely now than a year ago doesn’t mean they can’t happen. Lots could go wrong. But a fall in the price of disaster insurance is a good thing.
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