Todd Stein & Steven McIntyre
TEHRAN, Iran - Iranian president Mahmoud Ahmadinejad shocked the world today when he, all of the sudden, decided to wind down his country's nuclear program and make peace with the West. "Today I have decided to replace our plans for nuclear energy with eco-friendly wind power. Furthermore, I look forward to my upcoming trip to Tel Aviv where I will introduce a free trade agreement for the greater Middle East." Markets reacted immediately sending oil back down to $40/bbl and gold to $300/oz as tensions in the region have evaporated.
The preceding scenario is obviously fictitious, but you wouldn't guess it based on the mainstream media's reaction to rising commodity prices, especially gold. For the past few weeks, as gold has inched its way closer to an all-time high set over two decades ago, the talking heads have cited events in Iran as the catalyst for precious metal price increases. If tensions were to suddenly cool down, then everything would be hunky-dory in the world of rising commodity prices. Okay, maybe we can buy this argument for crude oil, where the price per barrel likely has a small unquantifiable geopolitical risk premium built into it. But for gold, this argument is hogwash.
We have all read reports of upper-class Iranians stockpiling gold as tensions continue to rise, but this shouldn't really have much of an effect on the price level as Iranian demand is a rounding error in the world of gold. The reason why gold has more than doubled over the last four years has to do with the diminishing amount of confidence in paper assets, namely those denominated in U.S. dollars. Savvy investors in Asia and Europe are very much aware of the risks of holding dollars, yet most of us in the Western Hemisphere are still asleep at the wheel. Ninety-nine percent of Americans haven't got a clue about gold. Maybe 1 out of 1000 Americans under the age of 40 even know what a Krugerrand is - yet the media is portraying those who buy gold as doing so for Iran protection.
Gold and silver are gaining in popularity as the price rises, but we are nowhere near the media saturation levels of real estate or stocks. When the mainstream media wakes up to gold, only then will we hear about price increases resulting from a lack of confidence in paper assets rather than tensions in Iran.
May 3, 2006