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End of the World Fears Help Fuel Gold Rush

Peter Suciu | Special to CNBC.con
Wednesday, 6 Apr 2011 | 9:38 AM ET
AP

Gold prices are climbing to record highs, with some believing that gold could cross the $2,000 mark by next year. Why? In part, because some people believe the world will end when the Mayan calendar is set to end on Dec. 21, 2012.

“Gold has been a useful store of value for 6,500 years,” says Andrew Gause, who publishes the newsletter “The World of Money” and is author of The Secret World of Money. “Uncertainty causes people to see stable value, and gold provides that confidence.”

Among investors, there is a subset known as “gold bugs,” people who are particularly bullish about gold, even if many of them are bears about prospects for the world’s continuation.

The first “gold bugs” gained fame in the 1896 Presidential election, when supporters of William McKinley showed their support for the lustrous metal over what is called “bimetallism” – a monetary standard in which value is defined as equivalent to a certain quantity of gold or a certain quantity of silver.

Another story of the origin of the term dates back to 1843 with Edgar Allan Poe’s story “The Gold Bug.” This tale centered on a treasure map and the search for a bug thought to be made of pure gold.

Today’s gold bugs fall into two main categories: Those who promote gold as an investment, and those who think of gold as a monetary standard. You can believe one and not the other, but these days the lines between the two groups often blurs.

“There is confusion with gold bugs,” says Stephen Zarlenga, director of the American Monetary Institute, and author of The Lost Science of Money. “This is essentially confusing money with an investment. Gold can be a good investment at times, but if you look at it carefully you want something different from an investment from what you want from money.”

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With money you want stability, whereas with an investment you want higher and higher returns. These purposes tend to be mutually exclusive — and gold can’t be both, at least not at the same time.

“Gold bugs are people upset with what is going on with our monetary system,” says Zarlenga. “They are aware enough that there is a real problem with money. They probably don’t have that much in the system, and as a result they confuse money with investment.”

Many gold bugs tend not to believe in the notion of fiat economics, adds Zarlenga. “They often believe fiat money is something from the devil.”

Lawrence White, professor of economics at George Mason University, says people know that gold can be bartered with, and for gold bugs, that knowledge gives them comfort as they contemplate the possibility of world-ending, or least world-altering, events.

The current fears of 2012 disaster scenarios are not the only time gold has risen in price. Historically gold has gone up in times of great economic uncertainly, notably during the Great Depression, and more recently with Y2K fears a dozen years ago.

But White points out that using gold to barter with during end-times events has problems.

“These people who are buying gold must be expecting that in the event of a disaster or financial meltdown they won’t be cut off from their supply of gold," he says. Meanwhile, gold can be heavy and difficult to move. “People can barter with gold coins and these can be worth a lot, but you still need to make change when you buy something. For that reason gold has problems.”

Despite the current 2012 frenzy, most people do not think the world is going to end. And even if the economy melts down or other disasters occur, it's still unlikely the United States would ever return to the gold standard, say experts.

"They may think this experiment is going to end, and that we're going to have gold and silver currencies, but paper has just proved useful as money," says Gause, who adds that the current increase in the price of gold is also in part a result of the Fed's balance sheet. "This has doubled the supply of money, and they're going to have trouble bringing that money back in. But if you ask 100 economists, 'Do you think we should return to gold standard,' you'd be hard pressed to find one who would say 'yes.'"

That said, the gold bugs still push it as an investment to hedge against not only inflation but also against the end of the world. In reality, though, it isn't the best investment for doomsday, given the fact that many buyers don't actually get physical gold but merely a certificate stating they own gold. If doomsday comes, that certificate might only be worth the paper it is printed on.

So to hedge against doomsday?

"That's the worst reason of all," says Gause. "If the world is coming to an end, the last thing you want to buy is gold."

"Apocalypse 2012" will air on Thursday, December 20, 2012 at 9 p.m. and midnight ET on CNBC. The documentary will repeat on Friday, December 21, 2012 at 8 p.m.