Fool’s Gold: The Mania for the Shiny Stuff Keeps Spreading

There’s no investor too amateur for it and it’s impervious to market forces or basic logic. Where does gold go from here, and will you go with it?

A few months ago, at a small fete for Sex and the City author Candace Bushnell’s new book, the party’s host, Bright Lights, Big City author and Manhattan gadabout Jay McInerney—swaying about in a white tuxedo jacket—joked to The Observer that he had started his own hedge fund. “I think I’m just going to be a goldbug!” he said.

In the unlikely event Jay McInerney was, in fact, a goldbug, he would have made a small profit in the intervening months. Same with Glenn Beck and Cash 4 Gold, or one of the many multiplying outlets you’ll find to sell off your gold like it, now with brick and mortar locations in strip malls across America. Even in Chinatown, among the district’s famously sketchy wares—the cheap, fake approximation of Prada clutches and rainbow-stamped Louis Vuitton bags—there are signs that note in flashy capital letters WE BUY GOLD. In late May, Utah legislators frustrated over federal economic policy legalized the use of gold and silver as currency. From uptown to Chinatown to Provo and beyond, everyone’s going for the gold. And it seems that anything the economy does could potentially be good for it.

“Everything through the gold window is like a house of mirrors,” said CNBC reporter and NetNet editor John Carney. “If because of the bad economy it looks like we’re headed towards a period of deflation, that should be bad for gold. But it could be good for gold. We’ve been in a period for a while where everything is good for gold. “It’s actually a joke on Twitter,” he continued. “#BuyGold. ‘Rabid squirrel bites girl in town. Buy Gold!’ And literally, if you had followed that advice all along, you would’ve made a lot of money!”

“Gold has proven to be a superman investment. It can leap over buildings and do things that investments aren’t supposed to do. And it’s laughing at us.”

But there are some very un-funny implications. In 2009 at the Davos Economic Summit, Yale Economist Robert Shiller read off a checklist of Bubble Behavior, among which are: soaring beyond the economic and culture saturation point at which other hyper-inflated markets have crashed (check), sharp increases in value (check), envy-inspiring stories of those earning money among those who aren’t (check), and “new era” theories explaining why now is the time to get in (check). Despite all of this, gold has continued to rise.

And as a function of that, some people are still laughing their way to the bank.

Last November, David Einhorn—the Greenlight Capital wunderkind who started his fund with less than $1M and who just acquired a stake in the New York Mets (if that isn’t a sign of money to burn, what is?)—revealed in an interview with Wealthtrack that gold was the biggest position in his fund (Mr. Einhorn declined comment for this piece). According to the New York Times, hedge fund all-star John A. Paulson netted $5 billion in 2010 thanks to securities that represent a chunk of gold larger than the holdings of the Australian government or the whole of Bulgaria. Even after billionare George Soros shifted his position on gold this year, Mr. Paulson stayed the course, putting more money into AngloGold Ashanti, the world’s third-largest gold producer. Employee capital reportedly represents 42% of his Paulson Gold Fund, which deals exclusively in gold-related or gold-backed investments.

Even the great state of Texas—ever famously oil money—is bowing before the golden gods: the University of Texas Endowment Fund currently has somewhere under $1 billion of gold bullion stored in a New York City vault.

From Mr. Carney’s vantage point, the value of gold has been driven by the realization of its potential not just as a diversification asset, or an inflation hedge, but the inherent value it holds against shakier propositions.

“Gold isn’t subject to political currents. Even if someone makes a big discovery of gold, the size of the amount of gold in the world, that won’t affect the price, whereas if you take a discovery of something useful—like energy—it could hurt the price of other known sources of natural gas in the world. That doesn’t happen with gold. The price of gold isn’t a price of discovery,” he said, “but the size of demand.”

Which brings us to the unique creature known as the Goldbug—a being consumed by demand and unmistakable even in an already frothy market. That creature for whom there is one answer for light, life, and wealth in the universe: the yellow, shiny one. They move in packs, and can generally be found vehemently defending their sworn protector and source of wealth against anything that stands in its way. They sometimes sound unhinged.

“I am not a goldbug,” Mr. Gartman is careful to emphatically note. “I don’t like the goldbugs. I think they’re wrong. The goldbugs think the world is going to come to an end,” and some of them, he explains, are real “black helicopter folks.” But that hasn’t stopped him from owning gold. He just doesn’t have to be excited about it.

“It doesn’t make me happy to own gold,” he noted, “but the trend is up. Fight that trend at your own peril,” he explained.

Some have.

Fool’s Gold: The Mania for the Shiny Stuff Keeps Spreading