Some investors also saw the spike in gold as a warning signal to stock market bulls who have the result of central banks and governments pumping billions of dollars into banking systems to boost growth.

Ah. That single wire-story paragraph stands as the world’s greatest understatement for those dubbed “Gold Bugs.” Investopedia clues us in:

Gold bugs view gold as a safe investment that will protect them from currency fluctuations or downturns in the financial markets. Although gold is widely known as a standard of value, its price – like that of any other precious metal or commodity – fluctuates widely… This is a point frequently brought up by critics, who view gold as a standard of wealth from the past.

However, while there is no consensus, the market does continue to view gold as the traditional “safe harbor” during times of economic crisis. For example, following September 11, 2001, gold prices saw sharp increases as investors sold what they believed were riskier assets.

The core belief of the gold bug: Paper currency — so-called “fiat money” like the dollar or the euro — will eventually prove, unless you’re a paper-eating termite, worthless. From the Safe Haven blog:

A genuine gold bug is a person who is emboldened by knowing that 4,000 years of continuous economic history proves that EVERY fiat currency has failed, as they will always fail, and that gold will rise, just like it always has, because people have always turned to it as a last resort against losing everything that is still denominated in the depreciating currency! It’s a 100% guarantee! How can you NOT be bullish?

From the post “Gold is a currency you can rely on“on Gold Eagle:

Paper money, we all know, is a terrible store of value. The U.S. Dollar has been losing value rapidly ever since we severed our link to a true Gold standard. Let me give you an example of the difference between Gold and paper money over the long haul. Let’s say you had $100 worth of U.S. paper Dollars in 1930 and $100 worth of Gold at 1930 prices. Today, you would still have $100 in nominal U.S. Dollars, but it would buy much, much less in actual goods than it did in 1930. The Gold, however, could be traded in for slightly more than $4800 U.S. Dollars today…

But Gold hasn’t changed over the years, hasn’t grown, hasn’t paid dividends and hasn’t increased in its intrinsic value. Gold essentially has not become more valuable, paper fiat Dollars have become less valuable.

To the Gold Bug, government’s Original Sin occurred when Nixon took the U.S. off the gold standard in 1971, and only a return to that system can redeem the country economically. Only the gold standard can defeat the bankers who pull the strings and wreak financial havoc at the expense of the populace. From a typically prolix Gold Bug post called “Gold Wars: The Return of the Gold Standard“:

The ultimate defeat of the Western banking cabal can only be accomplished by reinstating a precious metals “standard” (or backing) for the global monetary system….While 21st century bankers like to pretend that they are great “innovators”, and claim that they have created a “modern” financial system which is a necessary ingredient of our high-tech society, the reality is that they are playing the exact same game they have been playing for thousands of years.

The modus operandi of the classic bankers’ scam is always the same. First they ingratiate themselves upon the rulers of a particular society by claiming that they provide a useful, if not essential service: they exchange paper “IOU’s” for gold and silver coins, replacing heavy, bulky coins with their near-weightless scraps of paper.

Originally, the scraps of paper are treated strictly as claim-stubs for the gold and silver of the original holders. However, as a society becomes more familiar with these scraps of paper, people begin using the scraps of paper for trade – as proxies for gold and silver.

As this practice increases in popularity, the gold and silver being held by the bankers as custodians is redeemed less and less often, because people simply keep swapping the scraps of paper between themselves….and, for over two thousand years the greed of bankers has caused them to take their “business” a step further: they begin creating more “IOU’s” for gold and silver than what was deposited with them.

Having been lured by the convenience of paper “money”, the people don’t even notice that bankers have begun “creating money out of thin air”. While nothing can dilute the original value of the gold and silver deposited (and hoarded) amongst the bankers, as the number of bankers’ notes in circulation increases – without any underlying increase in the wealth which backs the paper – the value of each note inevitably declines.

This is the true origin of “inflation”: increasing or “inflating” the money-supply devalues the currency, causing the nominal price for goods to increase.

That conspiratorial strain runs through all the Gold Bug literature. From the Safe Haven post:

I also know that there is a concerted, coordinated effort on the part of central banks, the International Monetary Fund, the Bank for International Settlements and many others to restrain the price of gold, as they have actually admitted over and over again, and thus the price of gold is artificially low.

And goldbug Howard S. Katz on the Gold Eagle site, writes:

Pretty much every newspaper, news magazine and TV news show is lying to you…screaming one word at you: “deflation.” Whether they use the words “Great Depression,” “Great Recession,” “economic crisis,” or whatever, the message is the same. Prices are going down…

The Gold Bugs do not believe that prices are going down. They believe that the pumping of so much new money into the economy by the Fed will create rampant inflation, a circumstance that has traditionally caused a flight to gold. Katz:

The only times that prices changed by any significant amount were times that government changed the money supply. When the money supply was increased, prices went up. When the money supply was decreased, prices went down….Through the autumn of 2008, the monetary base increased by a trillion dollars. As this money flows into the private banks, they will get a chance to create additional money on this base, and the regular money supply will increase by even more.

This $1 trillion represents a 70% increase on the money supply over a year ago… Unless there is a radical change in announced policy, the money supply of the U.S. will multiply by 4 times over the next 4-6 years.

What will happen to people who flew to “safety” by buying T-bills and T-bonds in the recent crisis? In 2014, they will be sitting with fixed income investments worth ¼ as much (in buying power) as they are now. What will happen to people who put their assets into gold and gold stocks? They will be ahead of the game as the investing public rushes into gold (as it did in 1979).

To the layman who watched helplessly last year as the banking system appeared to teeter on the verge of collapse, this all sounds quite plausible and impressive. More impressive than Katz’s resume, anyway, which he prominently highlights at the top of his blog:

“Howard S. Katz is a well known gold bug and author of four self-published books on money, the gold standard and politics. He also edits an investment newsletter on gold and gold stocks called The One-handed Economist.”

But that lack of institutional pedigree is no stigma for Gold Bugs, who believe the training of mainstream economists to be poisoned by the Keynesian establishment. From Katz:

This same establishment decided in September 2008 that all prices were going down. They filled the newspapers and the air waves with predictions of a dire “deflation.” …No, the problem is not that prices are going down….The problem is that prices are going up. The problem is that people believe this nonsense from these well-known sources.

Meanwhile a giant increase in commodity prices will gradually unfold, one aspect of which will be a great food shortage which will make spring 2008 look like a picnic…

So what to do? Well, you could buy some, uh…gold. From another editorial by Katz:

…the American public has no concept of how bad things are and what they need to do to protect themselves. This gives you a historical opportunity. You have the chance to buy gold while it is still cheap. People will say to you, “You bought gold under $1000? Boy, I wish I had done that.”

And this from Bob’s Gold Price Column:

Looking at how fast the US government and the Fed are creating fiat tokens (US dollars) out of thin air, it pays to measure your gains with something more related to reality like gold or silver, the classic measuring sticks for the last 5,000 years or so…

The combination of the US Treasury and the Fed have created extra dollars and made payments, extra guarantees and extra future promises of payments of over 13 trillion dollars in less than a year…Eventually, this has  baked into the cake roughly 50% future devaluation of the US dollar. And, it looks like this is just for starters.

Not to worry too much (some worry is justified as a really high gold price means some bad things are going to happen on the ground) for those already properly positioned. “There is no rush like a gold rush”. Gold looks like it is a month or two away from heading on up into new high territory.

Sounds pretty simple. But what does a mainstream economist like, say, Paul Krugman think of the Gold Bugs and their theories? Well, in a nutshell, to quote the Nobel Prize winner, “the ideas of our modern gold bugs are completely crazy. Their belief in gold is…not pragmatic but mystical.”

On the other hand, if you bought gold at under $300 ounce in the early years of the decade, maybe you’re not so sure…

It’s official. Cabin fever has officially set in. My mind is increasingly wrapped up in thoughts of gold, of mountain streams, rocky canyons and tricky descents into the same. At the Salem Gold Show this weekend one of the vendors dropped 7.5 ozt of fine gold on the floor, and while I felt terrible for them and hoped they could recover it all, part of me spied that jagged crack in the concrete floor under the pile of pretty pretty gold and thought about coming back with some crevicing tools… The mind wanders. There are so many possibilities and so little time in the day. Why isn’t retirement at age 45, or even 40? Who says I can’t make it happen early?

That post from the Gold Prospecting Blog captures the animating spirit driving many a seeker of the yellow metal. And now, it seems, with the more conventional American dream on hold for so many and the price of gold at a 20-plus year peak, a new rush to experience that “Eureka!” moment is on. The Washington Post reports:

While there is no way to quantify the trend, anecdotally it is clear that the jobless are showing up not only in California but also elsewhere around the country where gold has been found in the past.

“I have been seeing a lot of it this year, with so many people getting laid off or hours cut way back,” said Tim LeGrand, owner of TN Gold & Gems in Coker, Tenn. Permits for prospecting in the nearby Cherokee National Forest, named for the tribe pushed westward after gold was discovered in the early 1800s, have more than doubled since 2007.

The wealth of user-generated Web material would seem to bear this out as a genuine trend. Flickr searches on “gold panning” and “gold prospecting” yield a mother-lode of images depicting people bent over riverbeds and streams, pans in hands. The Gold dredging and prospecting photo pool has drawn dozens of photos from the prospecting life, and YouTube is full of gold-related-if-not-plated videos. This eight-minute bit from “The Gold Fever Show” is hosted by a guy who sounds a little like a young Walter Brennan. For how-tos, check out “Gold panning tricks” and the “Backwash and tap method.” Or eschew process to immerse yourself in the avant-garde silent masterpiece, “Sluicing for Gold,” starring some guy and his equipment.

Perhaps it takes a certain kind of optimistic desperation unique to Americans to believe in the potential success of this kind of endeavor—traipsing out the door at 6 a.m. with trusty pick and shovel, gleefully shouting to your spouse, “Honey, all our problems are solved!” while headed out carrying equipment you just bought over the Internet.

A quote from the Post story:

“People come out with high hopes and don’t realize the work that is involved until they get into it,” LeGrand said. “Most try a few days and give up. Many struggle on and learn to pan. Very few get enough gold to do them any financial good.”

But in the spirit of that optimism, a snippet from the Gold Buddies Blog:

After the drive I decided to play around with my detector on my Mother’s front lawn and I quickly found two quarters and a nickel. I’m sure there’s lots more there…

Eureka!