Sources quoted by Bloomberg News attributed the rise Tuesday to concern about the negative credit watch that Standard & Poor's placed on Treasury debt the day before; gold spiked about $20 an ounce immediately after the announcement. One source in the Bloomberg story, Michael Pento, a senior economist at Euro Pacific Capital in New York, offered this rationale for the rally:
"The U.S. credit rating will undoubtedly be lowered in the next few years. This will mean much higher borrowing costs and a much lower currency. International investors have been using gold and silver as an alternative currency and an alternative to the dollar, and this will only exacerbate and accelerate that process."
A note sent to journalists by Dow Jones Indexes on behalf of David Krein, senior director for product development and analytics, said: "What we're seeing today with gold is clearly a reaction to yesterday's credit agency warning that the U.S. must figure out a way to control its deficit. The jump in the price of gold past the $1,500-an-ounce mark is further evidence of the metal's 'safe haven' status as the testy U.S. political environment continues to raise doubts about the country's ability to resolve its near- and long-term budgetary issues."
Gold has served for decades, even centuries, as a hedge against inflation. Over the long haul it tends to underperform more conventional assets like stocks and bonds, however, and buying it during times of rampant bullishness has proven to be a bad idea.
CNN mentions that gold peaked at $825.50 an ounce in January 1980. It's nearly twice as high now, but the article points out that the 1980 price, when adjusted for inflation, works out to just over $2,200. Anyone who bought the metal 31 years ago to protect their wealth against the ravages of inflation did not get their money's worth.