The case against gold (Globe and Mail)

DAVID BERMAN

From Saturday's Globe and Mail

Published Friday, Dec. 10, 2010 6:19PM EST

Last updated Friday, Dec. 10, 2010 7:43PM EST

No doubt about it, gold is a hot investment these days. But its soaring popularity hasn’t persuaded Tim McElvaine that now is a great time to join the bull market in bullion. Quite the opposite, in fact.

“Today’s fad is tomorrow’s flop,” he said from Vancouver, where he runs McElvaine Investment Management, a money management firm. “I’m as confused as the next guy about what’s going to happen with currencies and whether [Federal Reserve chairman] Ben Bernanke is right or wrong. But I’m not sure a whole bunch of yellow stuff in a warehouse is going to do much.”

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Mr. McElvaine is a lonely figure these days – a bear on gold. Driven by fears of inflation and potential currency devaluations, investors have propelled the yellow metal to $1,400 (U.S.) an ounce, a remarkable climb from under $300 near the start of the decade. Now, with the price of gold hovering near a record high in nominal terms – though still below its 1980 peak when adjusted for U.S. inflation – the bulls see plenty more gains ahead.

In the middle of this market fever, it is easy to forget that gold still must obey the law of supply and demand – and that the underlying fundamentals are now looking distinctly negative for the metal’s long-term prospects.

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