Why is it no matter how much the world advances intellectually and technologically, people keep speculating on gold?

John Neff, who managed Vanguard Group's Windsor Fund for three decades, once offered this take on the precious metal: "It's not an investment, it's an emotional experience."

Emotions have been running high. Spot gold prices have risen 44 percent in the past 12 months. Gold futures reached a record $1,196.80 an ounce in New York last week before closing at $1,175.50 on Nov 27.

Gold has to keep rising if current buyers are to get any return. Direct investments in gold pay no interest. Some folks buy gold-mining stocks that pay dividends, but those are subject to declines in the companies' other mining businesses.

People are speculating in gold because the dollar has been falling and they think gold will hold its value. Others buy gold out of fear the money created as the US props up its banking system will lead to inflation. Others want the metal simply because it's increasing in value.

Gold's latest boom offers the US government an opportunity to capitalize on the emotions of speculators and sell off its own horde of the metal.

At today's prices, the Federal Reserve holds about $300 billion in gold. The Fed's balance sheet values the holding at just $11 billion, but this is based on a price of about $42 a troy ounce, the so-called official US government price established in 1973.

In these times of trillion-dollar budget deficits, $300 billion may not seem like much. Still, that money could pay some of the costs of any healthcare bill that comes out of Congress. Or it could help pay for wars in Iraq and Afghanistan.

The US probably would have to sell its gold a bit at a time so it didn't cause a slump in prices, partially defeating the purpose of the exercise. US holdings account for 27 percent of the gold held as reserves by central banks.

On second thought, speculators are so hungry for gold, selling by the US may not scare them.

The government, of course, seems content to let its gold investment lie in storage. Some economists would be shocked at the idea of getting rid of the country's stockpile, which they see as backing for the dollar. Do they think China and Japan buy hundreds of billions of dollar-denominated Treasury securities because America owns some gold? They buy because they're sure the US' credit is good.

Gold long ago was used by nations to balance their trade books. When the US bought more abroad than it sold, it paid the difference in gold.

It's comical to think of that today. Once the US economy gurgles again, the Fed's $300 billion in gold would only cover about six months of the nation's trade deficit.

European and Asian companies don't collect dollars for their goods because they expect a payoff in gold but because they think the currency has its own value.

Neff, 78, still manages money for himself and his family in suburban Philadelphia. "I'm still in the hunt," he says.

The hunt has never taken the veteran investor anywhere near gold. While the experience has been exhilarating lately, "I'm not attracted to it," Neff says.

If only others were so sensible.

David Pauly is a Bloomberg News columnist. The opinions expressed are his own.

(China Daily 12/02/2009 page16)