Today, advance teams are setting up chairs around a big table in Jackson Hole, Wyoming where Central Bankers will soon be pondering the world’s many contradictions and charting a path forward for monetary policy. On Friday, the top Banksters will reveal the latest garbled version of reality as they claim to see it and try to assure us (mere mortals) that they have a handle on the situation.
Have you lost faith in the international money system and the financial and political institutions that support it? You’re not alone. I’ve noticed that people are working harder than ever to earn a living, and they are more concerned than ever about how to preserve what they’re managed to accumulate in savings and investments. Assurances from the smartest minds in Washington, Brussels and Jackson Hole will not help.
Interest rates are at 500 year lows (even negative rates in parts of Europe and Japan), and this is causing many people to wonder how wealth can be preserved, how investors can earn a result on assets going forward, and how pension schemes and government programs can make good on their promises for the future. Traditional safe havens, such as “risk free” government bonds, offer very little yield if held to maturity and come with significant downside price risk if interest rates rise. Some warn of a “bond bubble” that could explode at any time. Likewise, asset classes that have delivered sold long-term returns in the past, such as stocks and real estate, seem overpriced and susceptible to crashes. Lots of us are also wondering what may be the ultimate result of trillions of dollars of money creation and credit expansion since 2008. Surely there could be unintended and unpredictable consequences in the future. Does anyone have a plan? Understandably, many of us are looking for alternatives, and conversations are turning to the topic of gold & silver.
I’m planning to write a series of posts that investigate GOLD from various angles. Before I begin, however, I would like to address some points raised by the dwindling but sizable majority of people who are still comfortable with paper money and government promises, and who may be dismissive of the arguments of the “gold bugs”. I believe that gold can play an important place as a hedge in a sound investment plan. However, before I lay out that case, it is important to address some of the popular talking points of the gold skeptics.
“Gold is a barbarous relic”
This quote is often attributed to John Maynard Keynes, and it concisely conveys the impression that gold is a part of our financial past, and we have advanced beyond it, as we have advanced technologically in so many other ways. In fact, Keynes did not say it, and the criticisms he did have related to a very specific form of the “gold standard” as it existed in the 1920s. He was an advocate for gold early in his career, critical of a flawed international gold exchange system that was put in place after WW1, and an advocate for sound money based by a basket of hard assets (including gold) late in his career, as WW2 was drawing to a close.
“There is not enough gold in the world to support finance and commerce”
NONSENSE. For all practical purposes, it is true that the total global supply of gold is fixed at any point in time, and increases in supply are limited by the amount that can be produced by mining each year. However, the finite supply of gold is adequate to support ANY amount of economic activity. The pertinent factor is not the quantity of gold, but the price. The price for gold can be calculated at any time as the simple ratio of physical gold to money supply, which are known quantities. It’s actually harder to determine the money supply than the gold supply, but depending on the definition used (M1, M2, whatever) and the ratio used, the implied price of gold required to support the actual money in circulation today throughout the world is probably between $10,000-$50,000/oz. A gold standard operating on a gold price that is too low would be highly deflationary (Keynes’ objection to the gold standard of the 1920s) and unworkable. However, there is always enough gold to back a money supply if a stable non-deflationary price is specified.
“Gold Supply Does Not Grow Fast Enough to Support World Growth”
Those making this argument lack an understanding of the important distinction between “official” gold and total gold. Official gold is owned by government and is available to support the money supply. Total gold includes official gold plus all privately held gold in all of its forms (bullion, jewelry, etc.). A government purchasing private gold to support expansion of the money supply is not fundamentally different from open market operations run by the world’s central banks every day, whereby they “print” fiat money to purchase government bonds, which is then placed in circulation by banks.
“Gold Caused the Great Depression”
No. It didn’t. The Great Depression was caused by incompetent discretionary monetary policy by the Federal Reserve from 1927-1931 and prolonged by experimental policy interventions by both the Hoover and Roosevelt administrations. Even the work of former Federal Reserve Chairman Ben Bernanke (a scholar of the Great Depression) indicates that money supply was not constrained by the gold supply at any time during the period in question.
“Gold Has No Yield”
In recent months, this argument has completely broken down, because compared to negative interest rates on bank reserves in some countries and negative yielding sovereign debt, gold’s “yield” of -0-% is superior. This actually highlights one of gold’s greatest strengths. The reason for lack of yield is simple. Gold has no yield because it has no risk. Like all currencies, the price fluctuates in relation to other currencies (price risk). However, gold is money: a medium of exchange, a store of value and a unit of accounting. Like other money, i.e. Federal Reserve Notes (dollar bills), it has no yield. Interest or “yield” is the price of counterparty risk, and gold has none.
“Gold Has No Intrinsic Value”
Really? That’s not an argument I can make with a straight face. 5,000 years of history and an almost primal human instinct say otherwise. Even if it were true, the same could be said about a lot of other things that people value, including fiat money, credit, financial derivatives and others. Gold is an element. It is exceedingly rare, durable, divisible and portable, and it can't be counterfeited. Smells like money to me.
I would like to recommend a book to anyone interested in this subject: The New Case for Gold” by James Rickards. This post is largely based on the Introduction to his book, and anyone who finds this information interesting and useful should probably buy the book. It was published earlier this year and is available on Amazon and bookstores everywhere. I don’t take original credit for the ideas here. My intent is to summarize the arguments made by Rickards and others and point you toward Jim’s book if you would like to explore the subject in more depth.
I would welcome a discussion in the comments with anyone who has an interest in the subject.
This post is here to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make or don’t make involves risk.
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Great post. Was happy to share on Twitter at stephenpkendal. Stephen.