Gold is not going up at all, paper money is going down.
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Samizdata quote of the dayMarch 10th, 2011 |
 81 comments to Samizdata quote of the day |
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Indeed – simple mechanics, really.
Somebody somewhere wrote:
Of course, something somewhere _is_ going up. It would probably be better to own that than gold. Until it goes down again.
Even Glenn Beck (often denounced as a gold bug) is careful to state that buying gold is NOT an “investment”.
An investment is a matter of buying something that can be used to help make stuff (“something” may be an entire company of course – not just land to build a factory on, or machines to put in the factory). Gold does have industrial uses – but that is not why people are buying it.
People tend to buy gold as a insurance policy (a store of value) not for its (nonexistent) revenue stream.
Gold (like silver and so on) can go up and down in value – but it does not lose all of its value.
Also, yes, the quote is correct – what is happening is that certain fiat currencies (such as the Pound and the Dollar) are falling in value – due to the production of lots and lots of them.
Formally one can make a defence of what (for example) the Federal Reserve is doing.
One could say “there has been a vast increase in the credit money supply over a lot of years, and the banks (and so on) are utterly unsound – therefore we are increasing the monetary base to back that credit money expansion, this does not mean that broad money (i.e. the credit money) will expand as well”.
The markets appear unconvinced by this defence – and I am also.
This is largely for a FISCAL reason.
The Federal Reserve is not just expanding the money supply to back up the credit (“broad”) money that is already out there – it is also doing so to fund the Federal government borrowing.
Let us say that what the “mainstream” media denounce as the Republicans “savage cuts” go into effect (not likely) that means that the deficit would be about 60 billion Dollars less.
Out of more than one TRILLION Dollars of deficit.
So the Federal Reserve (whatever it claims) we carry on producing vast amounts of Dollars, lending them out to Goldman Sachs, J. P. Morgan Chase and so on, who will (in turn) use them to buy American govenrment debt.
Or the Fed will just create money and buy the debt itself – Ben B. swore he would never do that (and then did it – on a huge scale).
Although the Fed tends to insist on buying Treasury Bills from Goldman Sachs (and so on) rather than direct from teh Treasury itself – this is part of the institutional corruption in the present American political system.
Bottom line?
Anyone holding Dollars should sell them – and they are.
Gold is very high at the monment and may fall – but the Dollar is an insane place to be.
It is not the case that something somewhere is going up. Currencies tend to be relative, so for example it would appear to someone from the UK that the price of the Swiss Francs is increasing dramatically, whereas in comparison to gold, its probably still declining, but not as steeply.
Gold is only a store of value, it has little real purpose, but a pile of cash can’t even do that.
@Rob Fisher –
I like the idea that the price of gold has kept steady with the price of clothing over 2000 years (and don’t have any reason to dispute that it has happened). However I’d suspect that clothing would have decreased significantly in cost over 2000 years owing to improved technology – so something doesn’t seem to be matching up.
Similarly with competition/improvement in manufacture etc, and food in the proverbial basket of goods should be going down in price. That they’re going up in price suggests paper money is being devalued more quickly than is being reported.
“Under the rule of the Roman Empire at the time of Christ (1st Century AD), one ounce of gold would have purchased a Roman citizen his toga (suit), a leather belt, and a pair of sandals. Today two millennia later in the west, one ounce of gold will still buy a man a suit, a leather belt, and a pair of shoes. Nothing has changed.”
Oh, codswallop.
Today’s gold price is U$1400 per ounce. Let’s not quibble about conversions from the Roman uncia the troy ounce and just stipulate ounce-for-ounce.
An excellent-quality all-wool men’s 3-piece suit, with
dress shirt , leather belt and silk tie thrown in, and altered to measure – $500.
A pair of all-leather Justin 0506 dress-quality boots – $110.
So one ounce of gold today will buy a man two complete sets of high-quality clothing as described, plus gasoline for a month and several trips to McDonalds.
More than 50% shy of reality – about par for the course for gold fanatics.
llater,
llamas
John Galt: “It is not the case that something somewhere is going up”. Actually I was thinking of things that really do increase in value, like shares in successful companies.
llamas and Jamess: yes, it would appear that clothing has got cheaper. That doesn’t conflict with the idea that gold has kept a constant value over 2000 years.
By the way, the passage I quoted seems vaguely plausible, but that’s about it. It’s hard to measure and possibly even meaningless with things changing relative to each other all the time. I think John Galt has it right: “Gold is only a store of value, it has little real purpose, but a pile of cash can’t even do that.”
Reliably storing value for 2000 years seems like a useful property to have. I can get better returns from real investments like shares but it takes *work* to buy and sell them at the right times.
Rob Fisher wrote:
‘Reliably storing value for 2000 years seems like a useful property to have.’
It surely would be. But gold ain’t it.
Less than a decade ago, gold was trading at $255 an ounce. Even allowing for inflation, a 500% variation within a span as short as 10 years doesn’t fit my definition of ‘reliably storing value’.
Those who call gold a ‘reliable store of value’ can only do so by very-carefully selecting points on the rollercoaster that is the graph of gold prices. That’s exactly what the ‘suit of clothes and a pair of shoes’ example is – two data points separated by 2000 years – and the reader is asked to believe that the same condition applied at all times inbetween.
This is how people sell gold. “That’s real money!”, says Gordon Liddy, clanking his shiny talismans together, and people still fall for it.
Gold can be (more often than not) a good hedge against short-term inflation. But a ‘reliable store of value’ – it ain’t.
llater,
llamas
Llamas:
I think the point is that 2000 years ago, gold would get you clothed, fed and laid, and it will still do so today. That sounds like a store of value to me. I can’t imagine a dollar bill will buy much in 2000 years, do you?
llamas, I’m surprised that anyone can still criticise gold knowing its history as a constant store of value for millenia. Numerous fiat regimes have come and gone since Roman times, and the current reserve currency, after a life of a few hundred years and a reserve status of only half a century looks to be on the wain already.
You criticise gold bugs for “very-carefully selecting points on the rollercoaster that is the graph of gold prices”, and then go and do it yourself by citing “Brown’s bottom” of 2000/1 when the gold dollar exchange rate reached an extreme.
I would argue that the turn of the last century was the time in the death throws of the current fiat system when the writing was on the wall as to its impending demise, and all stops were being pulled out to suppress the gold price.
Whether you agree with me or not, and I guess you will disagree, you should ask yourself why Zine Bin Ali went to all the trouble fleeing from Tunisia with a couple of tons of gold recently, when he could more easily have taken dinars or dollars.
That’s not even close to true. The value of money halving in the last 3 years? If that’s true, then everything would have doubled, which is most emphatically not the case. All prices are relative, of course, but unless you decree by axiom that all prices are to be measured in terms of gold – which would be just as absurd as decreeing the same of any other commodity – then any plausible baseline will show gold spiking, and paper money relatively flat.
Difficult to know what to store one’s saved wealth in.
Gold is about the most stable so far ?
But as for fiat currencies such as that paper money.
It is obvious that as they create ever more out of thin air, its value will go down.
The Zimbabwe dollar being one of the more potent recent examples.
What does one do?
I agree with Llamas.
While I agree that the best currency is based on a basket of real assets, the basket should not be full of gold; it should be diversified. Basic rule of investment.
Rob Fisher
“I can get better returns from real investments like shares but it takes *work* to buy and sell them at the right times.”
Active management of investments has been thoroughly discredited by research. Shame that most investors choose to ignore the research. Just hold a basket of diversified assets that has low risk yet is still tied somehow to real economy. In my book inflation linked corporate debt is about as good as assets get.
Land is about the only thing that has real value.
Unless that land turns to desert or becomes overlaid with water it can always be lived on and can produce goods for consumption and barter.
John East: Llamas can speak for himself, but I doubt that anyone here is making an argument for the viability of fiat currency. Rather, the argument is being made against gold as the ultimate store of value, and I think it has a merit. Gold can be a significantly better store store of value than many other commodities, but only under certain circumstances. Whether the current circumstances are it is debatable. I am of the view that they are (gold being much better suited to serve as currency in time of total collapse of the fiat currencies than say, land or oil), but I am still willing to listen to opposing views, if only because in many ways we are looking at an uncharted territory in the next several years, if not decades. Interesting times ahead.
It seems to me that one of the problems for gold is that it’s value depends on what other forms of money (the competition) are doing. For twenty years up until 2008 Western currencies: dollars, pounds, euros were pretty good stores of value. So, gold suffered. But in the last three years those alternatives have bombed and so gold has become much more attractive.
It would be interesting to know how reliable gold was in the days when it was used to back currencies. I suspect it was very good.
Nothing has real value except that which is agreed amongst traders. Any currency merely represents a token amongst them that signifies a certain value, and that value is constantly mutable.
Thus beads, cowrie shells, bits of shiny metal and pieces of paper with pictures of monarchs or rulers on them have all been used as trade tokens and none of them is more intrinsically valuable than the other. It’s true that you might struggle to buy a big mac with cowrie shells, however your piece of plastic might not convince a New Guinean tribesman to give you some of his fish. And nor might your Krugerrands.
Commodities are going up, grain and oil seed, coffee, beans, pork bellies maybe (I always wondered why historically American markets were so obsessed with pork bellies – no jokes about obesity please).
All that means is after asset values were inflated to underwrite the debt that fuelled the boom, everything else, mostly the food we eat, is catching up.
And of course America is trying to devalue but their creditors aren’t playing and are devaluing in parallel.
Kevin: all true, and, as in my above comment, (I hope) no one is seriously claiming that gold (or anything else, for that matter) has intrinsic value. In fact, there is no such thing as intrinsic value. Other than that, I must have missed your point?
Any time the word “gold” appears here, up pops llamas with his anti-gold diatribe. Predictable as the tides. It’s his version of the LVT.
No, that was about it Alisa. It’s just that I feel it bears repeating.
Kevin: yeah, maybe it does after all.
John K – it is entirely plausible that in 2000 years, a dollar bill in good condition could quite well get you fed, clothed and ummm ‘entertained’ … after a century or so, antiques do tend to increase in value, do they not … (OK, OK, Helen Thomas *is* an exception, I’ll grant you that) … (a slightly BC 4 gram bronze denarius seems to go for about $130-200) … hmmm, so ancient Roman bronze would seem to be worth its weight in gold, eh ?
Alasdair:
But by the same rule, a Roman gold coin is worth far more than its bullion value. My point is that in 2000 years, the United States will not exist, and without the backing of a state, that little piece of paper has no value at all.
Actually an once of gold will buy me 2-3 suits. But maybe I buy cheap suits. I have telecommuted for the last 10 years and lost touch with fashion. (Really, I am 2 steps away from buying denim overalls and being done with it.)
Gold is at $1,400/oz and my suit last year cost $450 (sans shoes, and other kit)
Just before Xmas, an article appeared in The Australian. It revealed that the people in Vietnam use gold weights as their preferred currency, instead of the official paper money.
John East wrote:
‘ . . .you should ask yourself why Zine Bin Ali went to all the trouble fleeing from Tunisia with a couple of tons of gold recently, when he could more easily have taken dinars or dollars.’
That’s not hard to answer. He did this because gold is highly-fluid, easily-transacted almost anyplace, and value-dense.
Two tons of gold is approximately 0.15 cubic metres in volume, or about 6 cubic feet, or a cube less than 2 feet on a side. That’s 64300 troy ounces of gold, or about $100 million at todays’ prices. Now, llamas knows a bit about currency so he can tell you that a $100 bill weighs 1 gram, so $100 million in $100 bills is a ton of paper that will be about 1.5 cubic metres or 53 cubic feet of cash. I know which I would take – especially now that gold is at an all-time high in price.
But the things that make gold a good bug-out medium for a dictator on the skids, don’t make it a reliable store of value over the long haul. You have only to look at long term graphs of gold prices which show that, in inflation adjusted terms, the price of gold fluctuates wildly in both the long and the short term. It is far too volatile to be considered a reliable wealth store.
Don’t misunderstand me – I fully grasp the issues of fiat money and I dislike it as much as anyone here. It’s just that I realize that gold is not the answer to those issues, and in fact has more and more-troubling issues of its own when used as a currency, and I’m not afraid to tell you so. Gold is just a yellow metal – it has no intrinsic value that sets it apart as a value token.
Anytime the word ‘gold’ appears here, and I talk about it, up pops Laird to call anything I say ‘an anti-gold diatribe.’ Predictable as the tides. It’s his version of the LVT.
There. Fixed it for you.
llater,
llamas
Except that for companies that do not pay dividends, that value is really as ephemeral as with any fiat currency. You’re just hoping that someone else will buy your shares for more at a later date. because they are hoping to do likewise at a later date.
With respect to nothing having intrinsic value, I’m sure a loaf of bread, a block of cheese and a gallon of water will go a long way to helping me stay in this world for one more day. This may point the way for a semi-stable store of value.
Thanks for the fix, llamas. Although truthfully I can’t remember ever having used the phrase “anti-gold diatribe” before. A single instance would seem to make prediction a bit dicey, but hey, you could be right. Funny tides you have where you live, though.
Richard, the point I, and presumably Kevin, were making is a very general one: if you are lactose-intolerant, the cheese has no value for you, and the same with bread if you have that wheat-intolerance condition, the name of which eludes me right now. And if you are suicidal, that eliminates food as value all together, etc. – you see the point. But of course, for the general purpose of this discussion, and for most people in what you may call ‘extreme circumstances’ you are correct: it’s water, food, fuel and shelter (and throw in weapons for good measure) that are most valuable in the immediate sense of the word. The problem with all those is that the most basic of them (water, food and fuel) are difficult to store in large-enough quantities to last for extended periods of time, while land is of almost no value if you don’t have the means to make it work for you. This is where precious metals come as store of “value”: by their nature (their relative scarcity and some of their physical properties) they are best suited to serve as alternative currencies. Of course they have their own problems (Llamas is correct about those) – that’s why banknotes came into being in the first place (needless to say, ‘paper money’ is not the same as ‘fiat money’).
This is one of those debates in which both sides are correct. The key decider is ones timescale. As far as we are concerned, with our future on a timescale of a few years up to perhaps several decades, gold can fluctuate wildly against fiat, and whichever one choses to hold depends on the current geopolitical climate.
Taking a longer view, as fiats rise and fall gold is always going to win. Other commodities could replace gold, but its durability, scarcity, and limited presence in the earths crust ensures its unique position over the millenia.
So, I agree with llamas over timescales of perhaps a lifetime, but if I was going to bury a legacy for my great great grandchildren at the bottom of my garden I would be crazy to bury a wad of pound notes rather than a few krugerrands.
Yes gold is not that efficient store of value in the short to medium term, you could double or halve your capital depending on when you bought and sold.
BUT. Gold isn’t going to zero. While paper assets most definitely can. As paper financial assets are held up in value by confidence, when confidence is low people flock to the thing that never goes to zero – gold.
Gold in counter cyclical – when everything looks rosy, who needs gold? It pays no interest, it probably is trending down in value, as paper assets are trending up. But when the chips are down, where does everyone head for?
Alisa, I personally am not lactose nor gluten intolerant so therefore, for as long as I continue to exist, those items will have some intrinsic value.
If you are talking goods for exchange, you have a point. Though since such intolerances are present in only a small fraction of the population, it is somewhat muted. In any case, you are focusing far too much on the details. My point is that the best store of value is that which meets peoples immediate needs. Food and water.
Of course, these are hard to store (water not so much). But possibly that should be seen as the nature of the game. You can have stability or you can have a lot but you can’t have both. Accumulating large sums of capital is an entirely artificial man-made conceit and isn’t really supported by the underlying mechanisms of the universe.
Richard, my general point was that ‘intrinsic value’ is an oxymoron, since the term ‘intrinsic’ is implicitly objective, and the word ‘value’ is anything but. But like I said, this is somewhat OT, and for the purpose of this discussion I’m with you (including bread and cheese – yummy).
Actually, you cannot have stability, period (not long-term – unless you are dead) – but I digress again.
Very true, but more importantly, it is a social conceit, and we are obviously discussing a social context here: if you live on a desert island, you have no use for neither gold, nor any other medium of exchange, so that point seems rather moot. People who accumulate gold are not planning for a post-nuclear apocalypse when they are the only person/family left on the face of the earth. Rather, they are planning for a not-so-far-fetched scenario where their national currency/the global reserve currency/both collapse and lose any value as a medium of exchange, while the population/society(?) around them continues to exist. Under that scenario, sooner than later people have no choice but trade, and barter can only take you so far – hence the need for an alternative medium of exchange. Now here one could argue on the merits of various such media. True, gold is just a yellow metal, just as the USD is just some pulped wood. But the reason that gold beats paper is that it cannot be inflated – it is fiat-proof, if you will. But again, it is not fool-proof neither as store of value, nor as medium of exchange – nothing is.
Jim wrote:
‘But when the chips are down, where does everyone head for? ‘
Well, for certain values of ‘chips’ and ‘down’, I guess . . .
When the blue chips are down a little, then gold might not be a bad place to go.
But when the chips are really down – as, for example, in parts of SE Asia today, poor buggers – gold is valueless, in the short- and medium term. Depending on what chips and how far down ‘down’ is, selling excesses of absolute necessities for gold in anticipaton of a futuire return to some level of ‘normalcy’ might not be a bad idea, although of course highly speculative. But when you are ankle-deep in chips, what will have value will be food, water, shelter and arms, and gold will just be a slightly-useless soft yellow metal.
Once again, looking at what despots and dictators decide to do when their chips are down is not a good guideline for the rest of us. Their values for ‘chips’ and ‘down’ are not realistic.
A lot of people head for gold in bad times because they are, quiote frankly, economically illiterate. Gold has an especial allure that makes people make irrational choices.
Look at the ‘stars’ of the Discovery Channel series “Gold Rush”. They mortgage all they have and leave their lives in ruin and despair, all to drag themselves and hundreds of thousands of dollars-worth of equipment into the back of beyond to go mining for gold, a thing none of them have ever done seriously in their lives. After 6 months of back-breaking labour and bankrupting fiscal foolishness, they come out with a few thousand dollars-worth of gold.
They could have made more money flipping burgers at minimum wage. Instead, they burned their financial pasts, their financial futures, their families, their health and everything they hold dear – for chump change.
But they’re going back, as soon as the snow melts! The lure of the yellow stuff and instant riches in the next shovelful of dirt is just too strong.
Same goes for those who buy gold in times like these. The worst tiome to buy something that you want to store and maybe increase value, is when it is at all-time high prices. And yet Gordon just has to jingle his shiny talismans on the TV, and people flock like sheep. Yeah! Gold! That’s where the smart money is! Well, if that’s where the smart money is – why are they selling you all the gold you want to buy at $1450 an ounce? The smart money right now would be buying people’s unwanted gold for cash, paying $500/700 an ounce (.999 melt equivalent) and then converting it to .999 and selling it at $1450 an ounce to people who can’t do math.
Oh, look, there – on the TV! There’s 50 different people doing just that! Hmm – you think that they and Gordon might be connected, somehow . . . .?
Just daydreaming, just daydreaming . . .
llater,
llamas
Forgot to address this:
True, but only short-term, because of storage constraints. Once you run out of water and food (note, water always comes first, way before food), what do you do? Go grow some more? Unless you are a farmer yourself, you need to trade. And even if you are a farmer, soon enough you want to obtain things other than food (like fuel and spare parts for your tractor). Yes, I do somewhat focus on details, that’s where they say the Devil is.
I hear that smite a’comin’ . . . . .
llater,
llamas
Alisa wrote:
‘True, gold is just a yellow metal, just as the USD is just some pulped wood.’
Actually – not. The substrate fiber of US currency is 100% cotton – no wood at all.
Yours, as pedantic as ever.
llater,
llamas
I would not agree, unless you’re using the human definition of “capital”. Bees do their best to accumulate a store of honey and pollen, while squirrels (in times of high nuttiness) bury nuts for later reference. Shrikes store insects and small animals on thorns so they’ll still be there for lunch tomorrow, while leopards do much the same for larger kills. It keeps the carcass safe from the hyenas.
Animals cannot squirrel away as much, for as long, as humans; but note that the word squirrel has entered our vocabulary as a description of the activity.
That is one thing you can say about the US dollar, at least it is printed on good quality paper.
Ellen, I would not classify those as “large sums of capital”. for one thing, they are not capital, they are food and water and for another, they are only there as a store of savings to get them over a period of shortage.
Anyway, while my broad point is that you probably can’t really expect to store value reliably in any significant amount, I agree that there are a few things that probably don’t stack up too bad. Precious metals are probably decent and rare luxury goods probably also. However, due to demand, gold is over-inflated at the moment and the best you can expect is that you won’t lose everything if it takes a tumble.
What we have at the moment is a lot of earned “value” looking for a home (housing market pun not intended). That’s going to bubble wherever becomes popular. Look for the less obvious options. If investing, invest where demand cannot drop to zero. Though diversification would be a better option for those not totally risk averse.
Thanks Llamas, I remembered something along those lines, but was in a rush to make a point.
Should be relatively easy to check that, no? You don’t need to go all the way back to toga-wearing times – even going back to, say, 1972 should give us at least some idea. Has anyone done that lately?
Gold is high relative to (for one example) the ratio of gasoline to gold during the Bretton-Woods years. It is probably low relative to the amount of money supply inflation since 2008. The reason gold is high is because of the common (and I believe correct) perception that significant inflation, hyper inflation, is preloaded into the money supply and can only be avoided by either (a) not having an economic recovery, or (b) making very substantial structural changes in our central banking system that remove lending funds from the economy.
I regard gold as the ultimate conservative store of wealth among those that are not directly consumable (food, energy, etc) for precisely the reasons posted by Jim at March 11, 2011 02:08 PM. Anybody who thinks our fiat currency is more stable than gold needs to look at a few charts. For example, compare crash of ’08 to current on these two_charts. Clearly evidence that substantial wealth transfer going on. Look at the changes in RAM adjusted money supply in this chart. Look at the size of the government debt and wonder how the government could have borrowed so incredibly much more money than the total that existed at the time they started borrowing. Why should government expenditures have gone up 20Xs since the end of Bretton-Woods (~1970) while the population has only gone up by a little over 1.5Xs?
Anybody who doesn’t understand that the dollar is being plundered of its value in order to fund more government schemes is in denial. It took ~2 years after the Weimar monitization for the light to dawn and consumer prices to go vertical. How long will it take us?
To those who are investing in gold, I do hope you are hiding it well. At the end of the day, the government is invested in perhaps the ultimate investment, arms and ammunition.
http://en.wikipedia.org/wiki/Executive_Order_6102
In partial response to Alisa’s question, here’s an interesting chart showing the price of a median (US) single-family home expressed in terms of ounces of gold.
Couldn’t agree more, Richard.
Laird, that is indeed interesting – thanks. The answer though is indeed partial, because what at least I get from that is that either the housing prices were overinflated prior to the crush (duh), or the gold has been overinflating since the crash (which was the original question to begin with). Basically we have here one equation with two variables, so we need one more equation. Still, food for thought.
Correcting the link in my reply to Richard – and I do urge him to take a look at it.
That link is broken, Alisa. Post up a fixed one and I’ll take a look.
Alisa, that would have been a ninja edit were Samizdata’s comment system so hideously broken 🙂
Interesting reading though I was aware of some of the details already. Hopefully that would be a near-Armageddon type scenario in western countries where gold confiscation has already been put in place in far freer times. Though nothing seems certain anymore. Which I guess is kind-of the point.
Perhaps we could stay in the realm of gold-type materials for comparison. How is gold doing against other precious metals like platinum, titanium and suchlike?
not so hideously broken
Yes, government will confiscate anything if it serves its purposes.
I have not checked the actual prices lately, but I understand that each precious metal’s price depends in part on the extent to which it is used in various manufacturing processes – think platinum in catalytic converters, etc. So, say, in economic downturn platinum would go up by virtue of being a precious metal much like gold, but it would also go up when an economic recovery is being expected – while golf presumably would not. It is well known though that all precious metals have been steadily going up since 2008, (and metals in general have been going up for much longer), so I don’t see how the comparison between them addresses your proposition that their prices are inflated.
What fault do you find with the SI commenting system?
‘gold‘, not ‘golf’ – duh.
Well, gold is also used in industrial processes so it may track in a similar way. Or not. But the point is to see if gold is bubbling. If its value tracks more-or-less with one or more other precious metals then suddenly departs in the last 4-8 years, that might be taken as an indication (though one should be wary of other factors of course)
Alisa, amongst other things, the lack of ability to edit a comment, if even for a short period, has led to several extraneous comments in this thread simply to fix broken things. I know there is a preview but humans are fallible. I have long since given up complaining though and just get in the occasional side-swipe from time-to-time
llamas, I find your statement,
“A lot of people head for gold in bad times because they are, quiote frankly, economically illiterate.”
…..quite offensive. Please don’t make such generalisations simply because many people do not share your opinions.
I retired nine years ago, and have supported myself, and my family very nicely thank you on the back of the current gold bull market, and I am not economically illiterate. Still, you did say “a lot of people”, so I’ll assume you did not include those of us posting a contrary view to yours on Samizdata as belong to your strawmen group of illiterates.
Yes, but not nearly to the extent platinum does. So they do tend to track in a similar way in an anticipation of the collapse of the fiat currency, but with gold tracking much higher. I presume that post-hyperinflation/stagflation scenario, it would be metals like platinum that would outperform gold, in an anticipation of an economic recovery. Anyway, you can easily look up actual prices on the web and see for yourself, but I don’t think that comparing gold to other precious metals is a good measure of its “bubbleness”, because if gold is in fact overinflated now, it is most likely that those other metals are as well, albeit maybe to a lesser degree. What I’d rather look at is a basic basket of goods that may include food, housing, clothing, fuel etc., and compare that basket’s price in gold at several points in time since the 1950s or even 1970s. That would be consistent with your point that “real value” mostly lies in things we actually consume, rather than use as a mere medium of exchange. Does that make sense?
I suppose there could be some bubble in other precious metals (though rising prices do not necessarily indicate a bubble). But they are not the ones being pushed on TV, blogs and everywhere else. If there is some bubble in them, if gold has shot up in comparison, that just means there is even more bubble in it.
True, assuming there is a bubble at all – which may well be the case.
BTW, if you really want to see prices going stratospheric, forget gold and look at silver. Or rather don’t forget gold, but rather look at the silver-to-gold ratio. Interesting times.
WRT your basket of goods, it has the problem that housing has recently been subject to its own bubble (and subsequent burst, of course) and fuel is subject to manipulations at so many levels. Food itself also has many problems with all the subsidies that apply.
My thought with other precious metals would be that maybe (big maybe) they should be subject to similarish pressures and would be somewhat off the radar for “I gotta put my dollars somewhere” type investors.
The main problem with gold is not any post hyperinflation or recovery scenario but that if the fiat currencies do not collapse, the price of gold will eventually peak, people will see better investments and sell, the price of gold will begin to fall and the bubble will burst. If gold is not too bubbly, it may still make a decent investment but if it is very bubbly, it could disappoint a lot of people.
Of course, I’m pretty leery of the fiat currencies so YMMV. I’ve already lost out significantly from what Brown did to the pound (and the UK economy in general).
At the beginning of 2006, platinum was trading at ~1 2/3 times the price of gold. By July of 2008, platinum was trading at ~2 1/4 times the price of gold. This reflected inflation but no major manufacturing worries. In fact, it suggests manufacturing bullishness and maybe a bubble in that sector. From July to October of 2008, Platinum dropped from ~2 1/4 times to ~equal the price of gold. Today it is at ~1 1/4 times the price of gold.
The $price of platinum reflects the markets anticipation of manufacturing combined with the markets anticipation of dollar value. After platinum plummeted to parity with gold, what did the market do? Hint, in reached ~parity in August/October of 2008.
One interpretation to take is that the movements of gold and platinum relative to each other reflects the markets bullishness on manufacturing and therefore market optimism in general. The $price of gold and platinum averaged together reflect inflation worries. The data on those two metals can tell you a lot about what the market is anticipating. It looks to me like platinum/manufacturing may have been bubbling prior to July ’08. I think that was the point the market began to anticipate a total collapse rather than just a sector collapse.
Something else to keep in mind is that precious metals have three different values. They can have numismatic value as collectibles. They have the value of the metal they contain. But they have one more value that is often over looked. They have value as a medium of exchange when others (dollars, pounds, euros, etc) break down. This means that coins like the US gold eagle will have better value than (IIRC) the maple leaf because the US eagle is alloyed for durability and the maple leaf is not. Because these coins can be carried and exchanged as standard units, they will have greater value than their metals content would suggest. I think for this reason platinum coins will retain value in a way they haven’t in other times of economic turmoil. That and the general shortage of mediums of exchange that will arise if the current (fiat) ones collapse.
Correcting my blunder:
That should read ‘with platinum tracking much higher’, obviously.
llamas does need my help, although I am generally with him – I do not trade in gold, as I see no intrinsic value there. You can make a bundle trading it, but that’s a play on the public’s sentiments. However, I thought I’d add Warren Buffett’s take on gold – I fully agree, although I despise the man for his moral views:
“[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
Buffet is not only morally deficient and a rentier par excellence, but he is ungrammatical! Barbarian.
Would that be the same Warren Buffet who bought and held up to 37% of the world’s silver supply for eight years and then sold it in 2006 for $7.50? Silver is now trading at around $36. Forfeiting a 4-1/2 year yield of 480%? Clearly somebody who understands precious metals. /sarc
I doubt gold will go up in value (against a basket of stuff) and in may even go down. But I am quite sure that gold will retain a substantial portion of its value regardless of what is happening in the fiat currency economies. To refer back to what Jim at March 11, 2011 02:08 PM said, it can’t go to zero. Fiat currency can. Precious metals are a hedge against economic catastrophe. Like most hedging, it will lose some money most of the time but save your skin occasionally. Think of the lost profits as insurance premiums. The cost of insurance is a waste of money unless you to need to make a claim.
@ John East – sorry for the delay. At the gun show!
I didn’t go to offend.
Note that I never said you can’t make money trading gold. The question is not whether you can make money at it – like any commodity, of course you can – the question is whether it is a reliable store of value. Which, self-evidently, it is not.
You say you have made a good living off the bull market in gold. Well done. So let me ask you this – are you buying gold today at $1450 an ounce (or whatever it is trading at today)? I’ll bet you aren’t!
The reason you have made a good living off gold -presumably since you retired, so let’s say for the last decade – is that there has been a general upward trend in the price, some of the time. But in other periods of similar length, you would have lost your shirt in gold. It’s just too volatile in the medium and long term.
The majority of the fluctautions in the price of gold, and especially recently, have been driven by irrational motivators, IOW, the economic illiterates I mentioned. The major producers are carefully riding the crest of this windfall wave, producing just-enough to keep the price as high as possible until all the illiterates have sunk as much as they are going to into their shiny talismans – at which point, the price will fall again, as it has fallen so often before. It has all the hallmarks of a classic bubble.
Other have alluded to how wonderful gold will be as a currency when everything goes to hell. Well, whenyou find yourslef in a warm handbasket, let me know hw your shiny talismans help you out. Me, I’ll have plenty of 12-gauge shotgun shells and a couple of years worth of boring but effective calories stacked in my basement. You can’t eat gold. Its only value lies in the possibility that someone will trade you something he has in order to get it – when everything in the world is more useful than gold, it will become just so much dead weight.
llater,
llamas
llamas,
Serious question here. First, I agree with you on food etc being a better store of wealth. There is no question about that and I made that point myself in my comment at March 11, 2011 06:36 PM.
What do you buy and or stock pile if you may have to evacuate? Especially if you may have to evacuate without a vehicle? I’ve long since lost track of how many people have asked and continue to ask me this question. I don’t have a good answer for them except shiny metals. How many weeks of food can a person carry on their back? For that matter, how many months can they carry in a car?
With everything from the local supply of corn flakes to fuel supplies to durable goods being taken from raw source to market using ‘just in time’ inventory planning, I believe our food, fuel and other consumables markets are extremely brittle and anything that disrupted supply for more than a week would likely lead to societal collapse, either temporary or permanent. If this happens, cities (and places dependent on irrigation and other situations as well) become very dangerous places and people living in them are wise to remain portable.
What do you recommend to people in that situation? Hardly a week goes by that I am not asked for advice by somebody.
Midwesterner – I wouldn’t hold myself out as any sort of an expert in this area, so what I say is worth just exactly what you paid for it. This is so far O/T that I would earnestly suggest that you petition our generous hosts for a new thread on just this topic.
That being said – We live in an area where the expectation of societal – issues – is a lot lower. We are also not in any flood plain (at the top of the hill) and there are no major causes of natural disaster in recent history. That being so, and since we have domestic animals that rely on us, our plans do not involve evacuation.
A person needs water, protein, and calories. We have water covered. Carbs and protein are covered by the storage of boring stuff like beans and flour, which are easily stored in huge quantities at trivial cost. We do a certain amount of canning, we should probably do more, but there is garden abundance in the summer. We also have the means and the ability to supplement our protein intake with what wanders across our property daily.
If I had nothing but money, I would buy US military MREs.
Several cords of split and covered firewood, and plenty more available. Arms and ammunition. Large, fit Dobermans. Tools and materials to make, mend or modify many things.
For trade – simple. 22 Long Rifle cartridges and 12-gauge shotgun cartridges. 22’s are (literally) cheaper than dirt and will last forever. And I have the materials to make tens of thousands of shotgun cartridges.
That’s our plan. I bet it has holes in it.
Glenn Reynolds at Instapundit regularly blogs on these issues.
llater,
llamas
Gold may be “overvalued” – but it does not suffer from the following……
An orgy of creating money (from NOTHING) announced today by Japan (which has the excuse of the worst event since World War II) and the European Union (which is does not – it is just political and financial corruption).
In this Japan and the E.U. are on the same path as Britain and the United States.
So people flee to something which can not just be vastly increased by a political order.
Such as gold.
I take the quoted author’s (and so this article’s) point to be about currency, media of exchange not investment. Survivalism is not where I intended to take the discussion although certainly I look at basic necessities as media of exchange to the point they can be carried on one’s person. I hadn’t thought of .22s but that sounds an excellent idea where possible.
A substantial portion of the US including many friends or relatives of mine live in areas of the US that are served exclusively by run-off water that would otherwise have gone to the Pacific ocean via one route or another. Pakistan and India each have ~100 deployed nuclear weapons and a long and violent history. Pakistan is in a prolonged and seemingly inexorable societal collapse and may look outward for villains and distractions. If there is a nuclear exchange, the fallout will play havoc with world food and surface fed water supplies. Very many people in the US may have to relocate and it is quite likely that in regions heavily effected, civil order will break down. That is just one of many possible scenarios. What if another solar flare event took down communications infrastructure?
I have no advice for people in extremely infrastructure dependent areas other than to relocate now or buy gold, silver and platinum coins. This is why I call gold a conservative, not a high risk holding. Yes it may lose a lot of value but in the absence of dependable paper currency (see Paul’s comments today about yet more monitization by the EU and Japan) gold, etc is the most portable form of wealth storage I can think of. I suspect our entire civilization is fragile in many ways because of ‘just in time’. It will only take a small failure to drive a systemic seizure.
Mid – I think your concerns about a rogue nuke may be well-founded.
But a wsier man than I has observed that most concerns about a nuclear weapon are misplaced. If you are close enough to it that it’s going to do you appreciable damage – you’re dead within days or weeks anyway. More than 20 or 30 miles from the epicenter, the blast effects will be very survivable and any impct on you will be long-term. That’s why the better plan is probably to stay in place.
We can see some of the irrational hysteria going on in Japan right now, fuelled by a media entirely staffed by liberal-arts graduates. Despite the fact that a reactor of the type that’s been damaged in Japan cannot “melt down” and cannot create a nuclear explosion, everybody’s screaming about another Chernobyl and how we’re all going to die when a mushroom cloud envelops Japan. Like TMI, the amount of radiation actually released so far amounts to the quantity of a few dental X-rays. More people’s lives will be cut short by the particulate and volatiles emissions from all of the other things that are buring out of control in Japan – but everyone’s all het up over the nuclear reactor, the harm from which will be indistinguishable from epidemiological noise. Same goes for a nuclear blast, for anyone more than a few miles from the epicenter.
llater,
llamas
But to compare a multiple device nuclear exchange to a malfunctioning reactor is I think misleading. Unlike the reactors drowning in water and venting some ‘hot’ steam, a bomb is deliberately designed to create a big explosion and it draws radioactive dust to high elevations where it can be carried around the world. And this is not including the possible consequences of local food/water supply terrorism. Unless places that depend on runoff for their drinking and irrigation water have a way to microfilter the water on a truly massive scale, then that water will contain concentrated radioactivity. Yes, homes with RO units will have safe drinking water but what of irrigation and all of the food it produces?
The other side of the equation is that it may not truly need to be a danger but if enough people think it is . . .
Rather than trying to anticipate and predict the consequences of every possible incident in order to obviate the need for a pocketable media of exchange, I prefer to have an option available. As a regular reader here, you know that I have looked into and found substantial reason for concern over money supply/financial system issues. Even in the absence of physical crisis, the fiat currencies are a rubber crutch. Add to that the extreme brittleness of our supply and distribution networks and I hope you can understand why I consider finding an alternative media of exchange to be time well spent.
Noting now that we are no longer speaking about ‘reliably storing value’, but rather about ‘a medium of exchange’ – if concern about ‘the brittleness of our supply and distribution networks’ is what concerns you, then your best medium of exchange would be one which bypasses that brittleness.
Gold would be a lousy choice. What good is gold if there’s nothing exchangeable for it?
My first thoughts go back to the founding of the republic – mediums of exchange which concentrate the needs that people have for food and firing into easily-produced and – verified units.
Distilled spirits, beer and wine – all have excellent calorific values and are easily-made and easily-verified.
Cheese. Salt. Sugar. Fats. Corn (food and fuel!).
If ‘a gallon of 50-proof alcohol’ (flavour at buyer’s option) were to become a universal unit of exchange, then the speed and amount of agricultural recovery from even a huge disaster would be amazing.
Gold would have value only to the extent that people’s memories made them believe it has value. Once the poor nutritional value of gold became clear, it would simply vanish from commerce. If there is to be a medium of exchange outside fixed units of verifiable commodities, it is actually better that it not embody its value intrinsically, as for example, in a coin made of a certain mass of ‘precious’ metal, because debasement will follow within minutes. And a medium of exchange is a powerful weapon, more powerful than a vast army – it should not be made too easy for your adversaries to use it against you.
llater,
llamas
Perhaps you are forgetting (or unaware) of the basic criteria for something to be used as a medium of exchange. From the Wikipedia link:
To be widely acceptable, a medium of exchange should have stable purchasing power (Value)and therefore it should possess the following characteristics:
1. constant utility
2. low cost of preservation
3. transportability
4. divisibility
5. high market value in relation to volume and weight
6. recognizability
7. resistance to counterfeiting
You have yet to name something that passes the carry-it-along test. I think your entire mind set is one of being ‘hunkered down’. A lot of people just don’t have that option. You appear to be suggesting that for them there is no point in doing anything.
You also appear to have overlooked the need for a coincidence of wants in a barter system.
You mean their memories of how you can’t crank up the computers and create new ‘gold’ at a keystroke? Its usefulness is not in how you can eat or burn it. It is that you cannot create it out of nothing. Anything can (and some amazing things have) serve(d) as money. The most important requirements are that you can’t flood the market with a bunch more and you can easily carry it around with you. In any system of barter like you propose, as soon as ‘the market’ saw production of something as being a road to riches, resources would be disproportionately diverted to produce more of it. I wondered at your choice of alcohol and thought of all of the ethanol plants around here diverting farmland into making an artificial surplus to fill an artificial demand. A large scale purely bartered economy would quickly become a series of bubbles as everybody tried to imagine the next hot commodity. Precious metals are very resistant to that happening on any kind of a scale. That is their strength.
Mid – all good points.
I’m not forgetting all those criteria – I’m just not assigning them the same (relative) importances that you are. And the relative importances will vary depending upon circumstances.
Gold historically fails some of these criteria very badly – notably divisibility and resistance to counterfeiting, which I lump in with resistance to debasement. Well-designed paper money (note, not fiat money, simply paper money) is actually a far better choice on almost-all counts – so long as the production is transparent, and the folks doing the printing can be kept from messing about with production. Bank of England notes, for example, used to be meaningfully-serialized and traceable.
Your argument boils down to the impression that gold is somehow self-limited in supply, and therefore you can’t ‘crank up the computers and create more gold’. That much is true – but there is no (practical) limit to the supply if a person, or a government, is sufficiently motivated. There has been more gold extracted in the last 50 years than in all of recorded time prior. Precious metals used to be more-resistant to bubbles – but not anymore, and the supplies of most of the ‘precious’ metals have all been subject to gross manipulations by both individuals and governments within the recent past. That’s what I mean when I say that your medium of exchange is an awesome weapon that can easily be turned against you if you let it be.
When the Nazis made plans to disrupt the economies of their enemies, they didn’t fool around with gold, even though they had a shed-load of it that they had looted from far and wide. They went after the common medium of exchange – bank-notes – because they understood that that was the quick and easy way to de-stabilize an economy. Make gold your medium of exchange, and pretty soon, ways will be attempted to manipulate that – which is in some ways a lot easier, because you don’t have to counterfeit it – some people will be able to dig perfectly legitimate medium of exchange out of the ground. Gold and silver are not hard to extract if you have high-grade ore and the will to do so.
The most-important criterion for any medium of exchange is not even listed in the Wikipedia article you linked – it is the confidence of the user in its reliability and that is a social and political artefact – it does not matter what the medium is if it lacks that.
The fixation with precious-metal currencies harks back to an earlier time when these metals were actually very hard to extract and purify, when coining was a fantastically-complex process that rendered the medium of exchange quite resistant to counterfeiting (but NOT to debasing), and the money supply was effectively quite limited despite the best efforts of those who wanted desperately to expand it. None of those restrictions now apply. I could build a coining press in my shop at home that would have been beyond the wildest dreams of the most advanced coiners of just a couple of centuries ago, and the materials to make passable dies are easy to get and work. The effieciencies of gold extraction have improved a thousand-fold in just a few decades. Gold used to be a fantastically-rare commodity, now it’s everywhere, and more is easily got. One single mine in the US, in 2009, extracted a quantity of gold that would have made one quarter of the entire world production just a century ago, at a lower cost of extraction than at any time in history – and a mass of silver besides. The Chinese are mining gold at rates that would have made the Sun King blink in amazement – I’m sure they are truthfully reporting their production on the wolrd stage. Poor basis for a medium of exchange.
llater,
llamas
So twice as many ounces of gold over the last fifty years? How does that compare to the world’s reserve currency over the exact same time frame? Mere doubling looks awful good.
You mean them politishun fellers? The same ones that are balancing the budget so they can start paying down the debt in, like, never?
The fixation with paper money harks back to an earlier time when governments were not inflating currency to fund breathtaking government debt.
llamas, I think we’ll have to agree to disagree on this. We agree on enough other things, I don’t think it’s worth us arguing further. Right now I see the choice for pocketable money to be paper or metal and I just can’t see even the slightest contest between them in light of the graphs I’ve been linking to. Graphs available from the Federal Reserve System.
Fair enough. Let me know if you need any 22’s.
llater,
llamas
Which brings up the question, in the situation that the shit does hit the fan:
“Llamas, how much gold for a box of 22s?”
“Mid, how much gold will you offer for a box of 22s?”
I suspect that until things stabilize, gold will be worthless. When things stabilize, promisory notes will again come to the fore.
WRT mobile people, most will be traveling with nothing. You will likely not be welcomed wherever you travel. You will be seen as a threat. I’ve run into people who are actively organizing to deal with such scenarios.