The Third Rail of Gold

by | May 23, 2001 | POLITICS

I have touched the third rail, and it is made of gold. For millennia gold has excited mankind’s passions, goading us to the heights of achievement and the depths of evil. Now, since I’ve been writing about gold’s role in the international monetary order over the last couple of months, and about gold mining stocks […]

I have touched the third rail, and it is made of gold.

For millennia gold has excited mankind’s passions, goading us to the heights of achievement and the depths of evil. Now, since I’ve been writing about gold’s role in the international monetary order over the last couple of months, and about gold mining stocks over the last week, it seems I’ve excited a few passions myself.

Never before on any topic have I received so many messages in my email box or postings on the discussion boards at my website, — or comments from my colleagues at And it’s all totally bipolar. People seem to either worship gold and gold stocks, or they loathe them. Now I’m caught in the middle, and all because I’ve dared to touch the third rail by mentioning gold.

I won’t even begin to try to diagnose the source of the emotional power that electrifies the third rail of gold. To me, gold is just one of several valuable indicators that helps me understand how the gears of economics interlock. I look at gold just as I look at the yield curve, foreign exchange rates, Fed policy statements, and a dozen other factors. I find it extremely valuable as a supersensitive forward-looking indicator of monetary liquidity. When I saw the uptrend in gold confirmed last week, I joined the “don’t fight the Fed” chorus, because gold told me that the Fed is finally really easing — not just pretending to ease. I didn’t lose a dime by waiting, either, because I haven’t missed a moment of this rally — gold simply convinced me that the rally wasn’t just a big, beautiful fake-out.

And to me, gold stocks mean no more — and no less — than auto stocks or chemical stocks or semiconductor stocks. It so happens I haven’t owned a gold stock for something like twenty years, a period during which gold itself has been in a long-term secular decline. Until last week. My interest in gold stocks now is a reasoned play on the possibility that gold itself is ready to recover from the dismal 22-year lows at which it found itself just last month. It’s a contrarian call, to be sure. I shouldn’t expect everyone to agree with me. Quite the opposite — even on my own trading team, when I suggested we should start panning for gold in gold stocks, I got nothing but looks of stunned disbelief.

But I stood by my reasoning. Once again, it’s “don’t fight the Fed.” The same reason that so many folks at are citing to justify their bullishness in equities. What’s sauce for the goose is sauce for the golden gander.

And that means that even those who hate gold had better root for it to go up. Because the fates of these two markets are inexorably intertwined right now.

It’s all about the end of the deflationary spiral, of which the collapse in the gold price was the most prominent evidence. Now the Fed is willing to re-inflate, and that’s a good thing for gold — and for the stock market. We see re-inflation in the drop in the long bond, and the widening of the spread between regular and inflation-protected Treasury bonds. We see it in the Dow Jones Industrial Average bottoming on March 22, the very day of the top in the yield of the long bond. We see it in the NASDAQ Composite bottoming on April 4, the day after the price of gold bottomed. We see it in the multitude of statements from Fed officials in the last 48 hours all telling us that inflation is nothing to worry about.

And we see it in gold stocks, the most useful of which behave like levered investments in gold itself.

I don’t accept that gold, and gold stocks, are doomed to march forever downward until they hit zero, and the “barbaric relic,” as John Maynard Keynes called gold, is consigned to the dustbin of history. I believe that gold always has had, and always will have, important monetary properties. But even without them, gold will respond to re-inflationary impulses in the economy. If nothing else, there is the fact that gold is becoming scarcer every day. Annual production now isn’t even enough to keep up with the global demand for jewelry. But, of course, if I were talking about a production shortage in oil, I doubt anyone would be getting so excited if I recommended buying oil stocks.

And yes, as I wrote here Monday, shorts are covering right now. But that’s not a rigorous reason for why gold — or gold stocks — should go down from here. Shorts are covering in the stock market, too, and that’s no reason to be bearish on stocks. Gold shorts are covering because their world has changed. The shorts are saying “don’t fight the Fed,” knowing that their free-money trade made possible by high short-term interest rates is over and done with. These are smart guys. They’re not covering because they think gold is going down.

We talking heads who write about stocks for a living share lots of ideas we believe in, and for me this is just one of them. In the fund I advise, I’ve invested slightly more than 2% of assets across three gold stocks — Homestake Mining, Newmont Mining, and Kinross Gold. Just part of this complete breakfast — in my fund, and in my writing. Big deal, huh?

Based on the tone of the reactions from my colleagues at, I guess it must be, although I can’t begin to imagine why. Give me a break! Let’s not make this into a bar bet where if gold stocks go down, I’m an idiot — and if gold stocks go up, the other guy is an idiot. This is just another trade, and all trades are based on disagreements — that’s why there’s a buyer for every seller, folks. There’s nothing personal or rancorous in it, at least not for me.

Well, what can I expect? That’s the third rail of gold. And whether you agree with me or not, you should thank me for having the courage to touch it. Many of you already have. In the last 24 hours my email has run 100% — without a single exception! — in support of the reasoned and principled way I’ve been discussing gold. Not necessarily agreeing, but urging me to keep calling ’em as I see ’em.

And that’s just what I intend to do. Successful investing isn’t about getting my colleagues to love me. If I want love, I’ll buy a puppy. Successful investing is about having the guts to make a controversial contrarian call. To be able to rigorously and consistently explain why you made it. And, if necessary, to admit when you’re wrong — when the market tells you, not when your peers tell you — and then to move on. That’s what it’s all about.

The views expressed within represent those of the author, and do not necessarily reflect those of Capitalism Magazine’s publishers.

Don Luskin is Chief Investment Officer for Trend Macrolytics, an economics research and consulting service providing exclusive market-focused, real-time analysis to the institutional investment community. You can visit the weblog of his forthcoming book ‘The Conspiracy to Keep You Poor and Stupid’ at He is also a contributing writer to

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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