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<tr><td><font face="Arial"><font size=5>Don't laugh -- take a shine to gold
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Commentary: It's not just for dreamers anymore

SAN FRANCISCO (CBS.MW) -- As the tired joke goes, gold has been the ideal hedge against capital gains.

After peaking at around $800 an ounce a couple of decades ago, its price fell to around $250 as investors around the world lost interest in an investment that was a perennial loser.

A comeback seemed increasingly unlikely as nation after nation saw their central banks unloaded gold reserves in a process that has essentially demonetized gold. Then there were the murky hedging tactics of the gold producers, leading to the price of that metal being set in the futures markets by speculators and no longer in the traditional"fixing" sessions in London by a group of the world's leading investment bankers.

Even the Swiss banks gave up on gold.

Sometimes it seemed as if the only person on Earth who truly believed that gold would ever rise about $300 an ounce was Thom Calandra, our esteemed editor-in-chief. Last year, he repeatedly pointed out that gold mine stocks were the place to be. His was a voice calling in the wilderness. See his related StockWatch about gold.

And he was absolutely right.

Gold stocks are up around 30 percent from their recent lows. The price of gold bullion, now around $309 an ounce, is, however, only up around 12 percent from what had been generally accepted as the equilibrium level of $275 an ounce.

In my judgment, the future performance of the entire gold sector will depend on whether the price of gold bullion makes another decisive move up. Increasingly, I suspect that it will.

And not for the usual reasons. The traditional gold bugs always based their wild forecasts on the pending end of the world as we know and love it. Included in almost all of the forecasts by these false prophets were runaway inflation and a collapse of the dollar, which would then trigger global currency chaos and lead, inexorably, to our return to a 19th century type of gold standard.

That simply ain't going to happen.

Inflation is under control. The dollar remains strong despite the ever- present huge trade deficit and remains, in fact, the only game in town when it comes to financing both international trade and global investment. And there isn't a central banker on the planet that wants to remonetize gold.

But you need look no farther away than Argentina and France to see why gold still has its place in our financial system. It remains the ultimate hedge against the unknown catastrophe that might lie somewhere down the road.

In Argentina today, he with a stash of gold coins is king. Its worth stands at a time when the banks are closed indefinitely, the currency markets are shut down, and people are literally beginning to run out of any acceptable"means of exchange" that they can use to buy the necessities of life.

The French have memories of similar economic and financial chaos in their long history where the only reliable store of value was the gold bullion they kept in their bank in Geneva. What, some must be asking themselves, does the rise to political prominence of a fascist like Jean-Marie Le Pen portend for their future?

The political climate in the Middle East also favors gold, since investors there have traditionally been large hoarders of that metal, again as a hedge against the unknown. Some of them must be thinking about accumulating more as worries mount about the future staying power of the region's autocratic regimes, including the House of Saud, regimes that have allowed the privileged few to accumulate immense wealth while leaving behind in poverty the increasingly revolutionary masses.

As the list of countries and regions under stress grows, so will the interest in the ultimate financial hedge. Under such circumstances, $350 gold no longer seems just the impossible dream of gold bugs alone.

Economist and author Paul Erdman is a CBS.MarketWatch.com columnist.


http://cbs.marketwatch.com/news/sto...D9376E4A60C22%7D&siteid=mktw



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