FORTUNE -- What happens when gold may no longer glitter enough to stave off the financial apocalypse?
The precious metal, a big beneficiary at quantitative easing's outset as investors sought a hedge against possible inflation, has been steadily declining. During the first round of QE in December 2008, the price of gold was $837.50 an ounce. The precious metal’s longer term run-up kicked into overdrive, with the price peaking in September 2011 at $1,922. Of course, this ultimately represented a dependency trap -- in April the price dropped 30%, in part on fears that QE would be coming to an end. Today, gold sits at around $1,371, a 20% drop in six months.
QE was only one contributing factor to gold’s run-up. Broadly perceived as a safe store of value in uncertain times, gold benefited from the sense of instability and looming disaster that has persisted since the financial crisis. Inversely, gold’s downward trend has corresponded with a tentative but broad-based sense that things are inching back to normalcy.
For one small group of investors, this return to normal places them in a new, confounding position. While a worried mainstream saw gold as a hedge against short-term instability, the past five years have seen huge exposure, particularly in America, for a set of ideas that sees gold as a protection against the total collapse of the financial system as we know it. Probably the most well-known proponent of this viewpoint is former Fox News personality Glenn Beck, who has persistently warned of the inevitability of hyperinflation, lawlessness, and bread riots in the wake of QE and other Fed initiatives to inject liquidity and expand the money supply.
Starting in 2008 and with little respite since, Beck has kept up a drumbeat of parallels between American monetary policy and disaster scenarios such as Weimar Germany. Whether by correlation or causation, Beck also happens to be heavily sponsored (both in his Fox News days and now in his internet enterprise) by Goldline, a company selling gold coins. Alex Jones, a goldbug and conspiracy theorist only slightly less influential than Beck, is sponsored by Midas Resources Inc., which ... well, guess.
Though Glenn Beck and Alex Jones are in many ways fringe figures, they have significant followings, and their goldbug ideas are part of an even larger pattern of thought that encompasses genuinely influential groups including Ron Paul’s Libertarian wing of the U.S. Republican Party, and the even more powerful Tea Party faction. "Anyone who is not looking at a financial collapse of the United States right now is not looking at our debt and the inability of our government to rein in costs. It’s no longer a case of if, but a case of when,” says Norman Cillo, a member of the Tampa Bay Tea Party. With that scenario in mind, gold looks like a pretty good bet, no matter what the market is doing.
Gold’s longtime nickname, “God’s Money,” captures some of the faith these goldbugs put in the yellow stuff as a life raft for the most extreme, yet imaginable, scenarios. For most of the last five years, this has been an easy enough proposition -- doomsayers could have their apocalypse and profit from it too, watching gold prices rise in dollar terms while also being confident in the commodity's value in the lawless, feral world they think Ben Bernanke’s monetary policy is laying the groundwork for.
For the last six months, though, things have been more complicated -- while goldbugs of all sorts have taken a haircut, the most extreme true believers now have to watch the value of their gold in dollar terms collapse, while sticking with the idea that the real collapse will be that of the entire U.S. economy in the near future, after which they’ll have the last laugh. It’s a reminder that gold, whatever its transcendent value, remains entwined in a very human economic system in the here and now, and that holding on to rocks has an opportunity cost.
But it seems the decline of gold has had little or no impact on the beliefs of the most prominent extreme goldbugs. “None. Zero, zip, zilch,” says Alan Madison, executive producer of National Geographic’s Doomsday Preppers reality show. “Gold for them has an inherent value that is independent of market fluctuations. They do watch [the market price of gold], but mostly just for chances to purchase.” Which ultimately is what separates the goldbugs from more run-of-the-mill gold bulls.
This indifference to the market is being fed by goldbug-friendly media and analysis, which has insisted that the decline is irrelevant, a buying opportunity, the product of a government conspiracy, or some mix of the three. Relying heavily on the broader conspiracist mindset that defines him, Beck declared after the gold crash that “something doesn’t smell right," further saying that “This is collusion. It is keeping the price of gold down for the sovereign central banks so they can store the gold.” Some have totally dismissed the losses by insisting on the difference between "paper" gold and "real" gold, an important distinction for goldbugs of the prepper variety. "They all take physical delivery, they don’t invest in [gold] derivatives or funds,” says Madison. Finally and most paradoxically, some goldbugs have said that the gold crash is a harbinger of deflation, a defeat for Fed policies and therefore -- presto change-o -- a validation of their underlying thesis that centralized policy can’t control the economy, and we should all prepare for Thunderdome.
This is all particularly amazing since, not only has the daily price of gold plummeted, but the hyperinflation it is supposed to hedge against hasn’t shown its face, even after five years of QE. In fact, we haven’t even seen slightly above-average inflation. According to some analysts, this is simply because it has had minimal effect on consumer spending.
Going forward, signs for gold in the mainstream market remain mixed. QE is likely headed for a taper, even if we’re not yet sure whether that’s in the near or middle term. This means gold’s function as an inflation hedge for the broader market is likely to become less relevant. But apocalyptic goldbugs seem genuinely unconcerned with mere dollars if it makes it possible for them to hang onto more gold. According to Madison, “This recovery is temporal, elusive to them. It’s based on us borrowing money, as far as they’re concerned.” Inflation is still the bugaboo: “The folks here recognize that the Fed’s digital printing of money is reducing the value of any non-hard asset. We realize that property, precious metals, and commodities will only increase in value while currency will drop,” says Tea Party member Cillo.
It’s difficult to quantify the relationship between these ideas and the real market. Glenn Beck, Alex Jones, and Ron Paul have huge combined audiences, but these are individual rather than institutional investors. And obviously, if they were market drivers in themselves, their unsubtle insistence on gold as the only decent store of value would have kept the dollar price trending upwards indefinitely as the economy itself shut down in the ultimate self-fulfilling prophecy. By contrast, as mainstream economists have pointed out, the current scenario reflects increasing faith in the overall economy and a hopeful shift of capital “from rocks to stocks” -- toward support for constructive human endeavors.
Even if they’re not all that directly influential, investors can gain insight from these outsider ideologies -- the rigidity and doomsaying of the most extreme goldbugs is an opportunity for reflection on gold itself. The market price of gold on any given day is made up of a very small slice of industrial value combined with a huge helping of psychological premium -- the self-fulfilling prophecy that gold is the ultimate secure storehouse of value in uncertain times. According to Cullen Roche of the Orcam Financial Group, “There's an explicit premium built into the price of gold because it's always seen as an alternative to the fiat money system.”
But, as Preppers’ Alan Madison is quick to point out, even that’s not nearly as timeless as the likes of Glenn Beck and his attentive followers would like to think. “Gold, in their mind, is eternally useful as a trade item ," he says. "Five hundred years ago it was salt, and suddenly it became gold. Or Whale blubber -- once that was used as a power source.” Madison’s not sure that gold’s value would hold in the case of a real economic catastrophe.
“It’s more mythological than anything else.”