The gold market, circa 2013.

In the more than four decades since President Richard M. Nixon severed the dollar’s last ties to gold, there have been two bull markets in gold — markets that peaked not that far apart, when adjusted for inflation. To a believer, gold is different from any other commodity. The others are expected to rise and fall with supply and demand. A supply shock, perhaps caused by a drought in Brazil or a confrontation in the Persian Gulf, may send the price of orange juice or oil soaring. A fall in economic activity may depress the value of any industrial commodity. A commodity, like any other investment, can become overvalued or undervalued.

But to the faithful, that doesn’t include gold. Sure, it has uses in the real economy, like jewelry and dentistry. But that is not the important issue. To them, it is money. It cannot be overvalued.

There was a time when gold really was money, when the gold standard reigned supreme. Its record was not an especially good one. There was the minor issue of supply shocks — as when gold from the New World caused drastic inflation in Spain — and there were repeated panics and depressions in the 19th century. A determination to stick to the gold standard helped worsen the Great Depression.

But to those who revere gold, such problems are minor compared to the sins of fiat money, which is defined as money not anchored in gold but instead determined by central bankers, who can — and eventually will — surrender to political pressures to devalue the currency. Discretion will be abused.

Those who back the gold standard think “you can design a rule that will tell you what to do, no matter what the circumstances,” says Robert J. Barbera, the co-director of the Center for Financial Economics at Johns Hopkins University. “But there is no one-size-fits-all rule for monetary policy. Ultimately, you need discretion.” Central bankers go in and out of fashion. Back in the late 1970s and early 1980s, as inflation grew and grew in the United States and other developed economies, their credibility was challenged as never before. Gold, and its sort-of sibling, silver, soared, but then crashed back to earth well before Paul A. Volcker, then the chairman of the Federal Reserve, proved he could and would tame inflation, even if doing so sent the American economy into back-to-back recessions.

During January 1980, as the first of those recessions was beginning, gold went from a little over $500 an ounce to $850 and then back under $700.

By early 1999, when Time Magazine put the Federal Reserve chairman, Alan Greenspan, on its cover as the head of “the Committee to Save the World,” central bankers had become geniuses. (The other members of that committee were the former Treasury secretary, Robert E. Rubin, and his deputy at the time, Lawrence H. Summers, who later succeeded Mr. Rubin.) The stock market was booming, recessions were distant memories and gold was under $300 an ounce.

After 1980, gold never got close to $800 an ounce until, once again, the central bankers began to look imperfect. In 2007, as the American economy struggled to deal with what was then seen as the subprime housing crisis, gold climbed back above $800 and then set a new high, in nominal dollars, early in 2008, early in the American recession.

This time around, the sin of central banks appeared to be one of inadequate regulation, and of allowing a credit boom to get out of hand. If William McChesney Martin Jr., a former Fed chairman, once said the Fed’s job was “to take away the punch bowl just when the party gets going,” Mr. Greenspan was spiking the punch during his final years.

The hostility to the Fed since then has been largely based on worries that, Ben S. Bernanke, Mr. Greenspan’s successor, was going to destroy the dollar. Having lowered short-term rates to virtually zero, the Fed and other central banks have purchased huge quantities of government bonds. That is not printing money in the sense that no printing press is involved, but in every other sense it is.

Surely, said those who believe in gold, burdensome inflation was just around the corner. The Republican platform in 2012 did not use the phrase “gold standard,” but said “as we face the task of cleaning up the wreckage of the current administration’s policies,” a Republican administration would appoint a “commission to investigate possible ways to set a fixed value for the dollar.”

By the time of the Republican convention, it turned out, gold had peaked at a little more than $1,900 an ounce. This week, in what looked like panic selling, the metal fell back below $1,400.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2013/04/19/business/gold-currency-to-some-is-acting-like-a-speculative-commodity.html?partner=rss&emc=rss