PeterIt's that old supply-and-demand issue.

When everyone wants something -- say, Hanna Montana tickets -- its price can go right through the roof. And though Ms. Montana's glittering performance may not exactly thrill you, the fact that it used to thrill about 50 billion young girls has, in many cases, literally sent the price of her otherwise $60 tickets to upwards of $2,000.

That may soon be gold's story.

Like Hannah Montana, gold coins certainly aren't everyone's favorite. For a good number of traditional stock-and-bond investors, the precious metal may as well be radioactive. Gold? It's a barbarian's relic. Why on earth would I want anything to do with that? is what one of these stuffy investors might utter, while looking down his nose at you.

But with the dollar in unprecedented inflationary danger under QE2, it's not out of the question to, one morning, find our economic world turned upside down...and, with it, the attitude of those investors who've looked down at gold coins all their lives.

If that happened, it could motivate these people to become official card-carrying gold bugs virtually overnight...not that there'd be an abundance of gold coins to buy at that point.


The trouble here is that gold has a notoriously inelastic supply. You'll never hear, Sure, go ahead, buy that 1,000 ounces of gold. We'll dig more up tomorrow.

It doesn't work that way. While people are mining the precious metal all the time, worldwide production has stagnated these last few years and is now running at a relative snail's pace. A flight from the dollar to gold would quickly eat up its current inventory and could, like those Hannah Montana tickets, send the price of the metal to the moon.

Analyst Doug Dillon, in his article, There's Just Not Enough Gold; Modeling A Dollar Flight To Gold gave us a picture of what this might look like. If there were just a 1% shift of the assets of US households (now in stocks, bonds and funds) into gold, maybe representing an I'm worried about the dollar attitude (but still falling far short of a panic), Dillon's model points to inelastic gold hitting $4,769 an ounce.

On the other hand, if there were a flight from the dollar that amounted to, as Dillon put it, a minor panic, his model literally has gold ascending the $10,000 an ounce throne pretty readily.

As astonishing as all this may sound, without enough gold around to satisfy panicky investors, these kinds of unreal prices might be quickly achievable.


Although it never fell under Dillon's minor panic category, the last time we had anything resembling a run on gold was back in 1980. Oil prices were way up, Inflation was out of control, the Russians were invading Afghanistan and a smiling Jimmy Carter had no answer for any of it.

As a result, gold and silver coins both reached record territory. At one obscure Woonsocket, Rhode Island coin shop, people were lined up around the block at midnight looking to either sell their gold and silver stuff -- like silver tea sets -- at those record prices or else buy gold coins as an antidote for the swelling inflation all around them.

At the height of it, the precious metal market began having problems getting people in and out. Dealers actually ran out of gold coins, bars and bags of junk silver to sell. True story. Values moved so fast it was hard to affix a price tag on precious metal products. Gold liquidity, which is usually excellent, became extremely sporadic in the face of such urgent buying and selling. Many dealers had nothing left to sell. It was a prime example of what happens when a whole lot of people suddenly want something of rapidly diminishing availability.

Was that midnight-line-around-the-block a preview of coming events? Will we see a full-blown flight from the dollar in our lifetime? Will Doug Dillon's $4,000 or $10,000 gold come to pass?

Think about all that the next time your daughter or granddaughter asks you to cough up $2,000 so she can go see Hannah or whoever takes Hannah's place.