Four Ways to Play New Gold Rush

Gold's Value? The Price of Fear

Indeed, what I find fascinating about gold is that even after a solid two-year run, it is still embraced by some of the most bearish and skeptical of professional equity investors and observers, such as James Grant, Bill Fleckenstein and Jean-Marie Eveillard. These are the sort of folks who demand high levels of intrinsic value when they buy shares of public companies, but are willing to embrace ownership of a clod of yellowish ore that has no real intrinsic value at all.

What is the value of gold? Its price is said to be the single most widely disseminated bit of information in the world, and yet it is worth only whatever market participants say it's worth at any given time. Its pricing is a psychological event, untethered to perceived scarcity or its tremendous usefulness as a conductor of electricity. Think of it, instead, as the price of fear.

As Eveillard put it in an interview last week, the value of gold depends in large part on the ebb and flow of distrust that people have for paper currency, not for its worth as a commodity. Consider that new Federal Reserve Board Governor Ben Bernanke in November openly backed the wholesale printing of money as a way to stave off potential deflation.

One hedge fund manager told me that the value of gold is simply that it has been considered a store of wealth by people in every part of the world for 5,000 years -- and is more likely to continue to be considered valuable in the future than any paper currency or government debt. As a result, many major buyers of gold who hold it in their safety deposit boxes or home safes don't see it as an appreciating asset that should be compared with the projected rates of return of other assets.

Instead, they see it as an insurance policy against future world uncertainty, a hedge against a time when terrorists, for instance, might find a way to wipe out the global power grid, rendering all of our electronic methods of accounting for wealth worthless. (Absent an ATM machine or a bank computer's records, how do you really prove you have liquid assets of $250,000? And even if you could prove it, how would you access your money?)