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A Couple of Thoughts for the Gold Bugs

by rifek Mon Nov 30th, 2009 at 07:31:39 AM EST

With all the economic instability roiling around, it isn't surprising that the gold bugs are out in force, claiming everything went to Hell in a handbasket when we went off the gold standard and that gold can restabilize everything.  A couple of thoughts on that.

originally posted on November 25 - Nomad


First, I believe it was absolutely correct that the US went off the gold standard and backed the USD with the whole economy, saying "The USD has value not because we have gold in a vault but because you can use it to buy timber and steel and refrigerators."  If gold had remained the sole basis for currency, South Africa and the Soviet Union would have had the top two currencies for years, and now Peru, Indonesia, Uzbekistan, and Ghana would be top tens.

The currency problem did not arise from changing to a new standard but rather from changing the new standard itself.  The US went from, "You can use your paper dollars to buy this ship we just made" to "You can use your paper dollars to buy this security we just made."  "Paper for steel" became "paper for paper", and the currency started to slide.

Second, while gold itself is solid, much of the market for some time has not been real gold but exchange traded gold, and I would submit that ET gold has become a psychological fungible for real gold.  I would further submit that this has in fact provided an avenue for "financial engineers" to manipulate gold prices.  And I would even go so far as to submit that this is why, for several years up until very recently, gold prices seemed to move with major currencies instead of against them.  Because ET gold is really just a piece of paper supposedly representing a certain amount of gold in a vault.  Which is what paper money originally was.

Given this manipulative element that has been injected into the market, how stable is gold?  And then there is always the little problem that you can't eat, live in it, or shoot somebody with it, and if the bottom really falls out, those are the things that will matter.

Display:
...but acquiring the food, shelter and weapons still needs some physical portable value method that is acceptable to the seller. Gold, in the form of jewellery, is carried around in many  cultures as not only ostentation, but also as a sort of credit card in an emergency. It's value that you can carry with you always. If the bottom really falls out...

You can't be me, I'm taken
by Sven Triloqvist on Wed Nov 25th, 2009 at 05:13:41 PM EST
This news two months ago got me thinking...

Anglo-Saxon gold hoard is the biggest - and could get bigger | UK news | The Guardian

Without question this is the largest group of gold artefacts ever found in British soil. Many of the pieces are of the highest quality design and technique, from a time that excelled in the creation of fine jewellery and weaponry. There really is nothing like it, but it reminds me of a prehistoric find made near Salisbury in the 1980s.

Here, too, archaeologists were staggered by the sheer scale: there were more than 500 bronze items, including curious miniature shields. But that hoard was illegally excavated and sold, and we will never fully understand it. By contrast, thanks to Herbert's professional skills and attitude, we know everything we could about the Staffordshire gold's context. That adds immensely to its academic value.

We don't yet know how big it is. The present list runs to 1,345 objects, including 56 lumps of earth. X-rays show them to be studded with pieces of metal. You can make out tiny decorative animals and jewel settings, but until the lumps are taken apart we will not know what's there. In other words, archaeologists have the prospect of themselves being able to excavate part of the country's most spectacular ancient hoard.

The phenomenon of buried hoards and the hobbyists scouring the land with metal detectors is specific to Britain - I am not aware of anything comparable on the Continent. Why is this?

The fact is that "civilisation" came to Britain with the Roman Legions and didn't outlast them very long. People who had some wealth got scared of the turmoil and decided to bury their wealth to return to it "when things get better". Trouble was, things didn't get better for many decades or even centuries. In any case, the turmoil outlived the people who knew where these buries hordes were.

I think what this illustrates is that in times of insecurity people will hoard gold, but in the end it won't do them any good...

The only "value you can carry with you always" is your skills.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Thu Nov 26th, 2009 at 04:22:27 AM EST
[ Parent ]
How many doctors/engineers/accountants/etc... from their country of origin drive taxis or serve fries in Paris, NYC or London ?

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Thu Nov 26th, 2009 at 04:44:44 AM EST
[ Parent ]
And how many doctors/engineers/accountants from Paris, NYC or London drive taxis or serve fries in Paris, NYC or London?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Nov 26th, 2009 at 05:05:14 AM EST
[ Parent ]
in a bad situation, it's certainly worth it.
by wu ming on Thu Nov 26th, 2009 at 12:24:22 PM EST
[ Parent ]
The phenomenon of buried hoards and the hobbyists scouring the land with metal detectors is specific to Britain - I am not aware of anything comparable on the Continent.

The hobbyists scouring the land may be confined to Britain, but buried hoards are a feature of many countries to some extent.

There's always the minor noble who buried his silverware before fleeing an oncoming army, and whose family never got around to getting back to said silverware (usually because the land it was buried on had changed hands or the family had ceased to exist during the war).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 26th, 2009 at 06:36:30 AM EST
[ Parent ]
I guess my claim is that in Britain everyone and their mother buried hoards, not just the odd minor noble here and there.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Nov 26th, 2009 at 07:00:36 AM EST
[ Parent ]
In Sweden, I think viking graves with gold and silver for Valhalla is more common then buried hoards.

Then again, in Sweden using a metal detector to search for buried treasure is forbidden. And if you do find something older hen 100 years you have to hand it in to museums (you get reimbursed with todays value of the metal included in the objects). So treasure hunting is not that common.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Thu Nov 26th, 2009 at 07:39:52 AM EST
[ Parent ]
In the UK hoards are the property of the Crown. You get handsomely compensated, but you don't get to keep the items.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Nov 26th, 2009 at 07:42:13 AM EST
[ Parent ]
Treasure trove - Wikipedia, the free encyclopedia

Coroners continue to have jurisdiction to inquire into any treasure found in their districts, and into who are or are suspected to be its finders.[48] Anyone finding an object he or she believes or has reasonable grounds to believe is treasure must notify the coroner for the district in which the object is found within 14 days starting from the day after the find or, if later, the day on which the finder first believes or has reason to believe the object is treasure.[49] Not doing so is an offence.[50] Inquests are held without a jury unless the coroner decides otherwise.[51] The coroner must notify the British Museum if his or her district is in England, the Department of the Environment if it is in Northern Ireland, or the National Museum Wales if it is in Wales.[52] The coroner must also take reasonable steps to notify any person who appears may have found the treasure; any person who, at the time it was found, occupied land which it appears may be where the treasure was found;[53] and any other interested persons, including persons involved in the find or having an interest in the land where the treasure was found at that time or since.[54] However, coroners still have no power to make any legal determination as to whether the finder, landowner or occupier of the land has title to the treasure. The courts have to resolve that issue, and may also review coroners' decisions in relation to treasure.[55][33]

When treasure has vested in the Crown and is to be transferred to a museum, the Secretary of State is required to determine whether a reward should be paid by the museum before the transfer[56] to the finder or any other person involved in the finding of the treasure, the occupier of the land at the time of the find, or any person who had an interest in the land at the time of the find or has had such an interest at any time since then.[57] If the Secretary of State determines that a reward should be paid, he or she must also determine the market value of the treasure (assisted by the Treasure Valuation Committee),[58] the amount of the reward (which cannot exceed the market value), to whom the reward should be paid and, if more than one person should be paid, how much each person should receive.[59][33]



Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Mon Nov 30th, 2009 at 08:10:55 AM EST
[ Parent ]
Such a "The phenomenon of buried hoards and the hobbyists scouring the land" occurred in the USA in the 1820s & '30s--sans electronic metal detectors. Perhaps it was fed in part by the knowledge that the Cherokee had a gold mine in northern Georgia, the proceeds from which they used to finance their legal contest of Andrew Jackson's Indian removal policies to the U.S. Supreme Court.

But there is also the story of Joseph Smith and the Angel Moroni who he described as first appearing to him in 1823 and telling him of the gold tablets buried on Hill Cumorah, providentially located adjacent to the Smith family farm in upstate New York. Smith describes retrieving the tablets in 1827 along with the Urim and Thummim, Old Testament stones for divination. As rumors spread, this likely added to the number of those "scouring the land."

Word of the discovery of gold at Sutter's Mill in California turned the quest into one purely for naturally occurring precious metals, which, when found, had the effect of spurring the expeditious admission of California as a state to the United States in 1850 and Nevada in 1864. From then until the end of the century there was, essentially, free land and free money for those who could find it and claim it.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Nov 26th, 2009 at 12:41:31 PM EST
[ Parent ]
Actually, as far as I know, most hoards in Britain were of Viking origin, and were offerings to the gods.

The reason why they are theorizing that this horde is not an offering is that the vikings very rarely showed such generosity towards their gods. There was frankly too much gold in the hoard.

What is quite out of the question is that this hoard had anything to do with the Romans leaving. The gold has written inscriptions tentatively dated to the seventh to early ninth century.

See Wikipedia for more info: http://en.wikipedia.org/wiki/Staffordshire_Hoard

by Trond Ove on Tue Dec 1st, 2009 at 04:57:18 PM EST
[ Parent ]
If it gets to that point and someone wants to sell me food, guns, ammo, or land for shiny metal, I'll probably have a wonderfully Gothic bridge in Brooklyn to sell as well.  I shall be accepting neither gold nor silver for any of the above.
by rifek on Sat Nov 28th, 2009 at 01:17:52 PM EST
[ Parent ]
Precisely.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Tue Dec 1st, 2009 at 03:51:06 AM EST
[ Parent ]
... saving - a quarter each in equity, bonds, interest-yielding "cash", and physical gold bullion, with profits taken every quarter or year at fixed times to maintain the ratios - has return on gold dragging down average returns in most situations, but exploding in value in case of an across the board collapse that takes down equity, bonds and cash alike.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Mon Nov 30th, 2009 at 11:29:40 PM EST
[ Parent ]
See Willem Buiter's: Gold - a six thousand year-old bubble (November 8, 2009)
Gold is unlike any other commodity.  It is costly to extract from the earth and to refine to a reasonable degree of purity.  It is costly to store.  It has no remaining uses as a producer good - equivalent or superior alternatives exist for all its industrial uses.  It may have some value as a consumer good - somewhat surprisingly people like to attach it to their earlobes or nostrils or to hang it around their necks.  I have always considered it a rather vulgar metal, made for the Saturday Night Fever crowd, all shiny and in-your-face, as opposed to the much classier silver, but de gustibus... .

...

Because to a reasonable first approximation gold has no intrinsic value as a consumption good or a producer good, it is an example of what I call a fiat (physical) commodity.  You will be familiar with fiat currency.  Unlike what Wikipedia says on the subject, the essence of fiat money is not that it is money declared by a government to be legal tender.  It need not derive its value from the government demanding it in payment of taxes or insisting it should be accepted within the national jurisdiction in settlement of debt. Instead the defining property of fiat money is that it has no intrinsic value and derives any value it has only from the shared belief by a sufficient number of economic actors that it has that value.

...

Gold is very close therefore to the stone money of the Isle of Yap.  This stone money, known as Rai, consists of large doughnut-shaped, carved disks, consisting usually of calcite, that can be up to 4 m (12 ft) in diameter, although most are much smaller. Apparently, the total stock of Rai cannot be augmented any further.  It also depreciates very slowly.  This intrinsically useless form of money in the Isle of Yap is in all essential respects equivalent to gold today in the wider world.  Another example would be pet rocks, as long as the rock in question is rare and costly to get into its final shape.

A followup from a week later reports that Rai is now worthless in the Isle of Yap.
Far be it from me to assert that a fate similar to that suffered by the Yapese Rai will befall gold - another intrinsically worthless fiat commodity.  But the demise of the Rai as a store of value and means of payment, when taken together with the historical experience of pre-columbian native American tribes and nations that attached very little value to the shiny metal, should give the gold bugs some sleepless nights.  More importantly, it ought to discourage investors who are not rich enough to survive a speculative disaster from putting too much of their savings into this frivolous store of value.


En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Wed Nov 25th, 2009 at 05:33:46 PM EST
And see a view critical of Buiter's views on gold here.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Nov 26th, 2009 at 01:56:54 AM EST
[ Parent ]
"Nine out of ten cave men prefer super senior tranches...."

The tenth cave man (me) simply says that if it get to the point where gold matters, gold won't matter, and Jesse can try eating his hoard.  Or perhaps he expects his god to make manna rain down.

by rifek on Sat Nov 28th, 2009 at 01:23:34 PM EST
[ Parent ]
In case the above is a paraphrase or parody of Jesse's writing, the context might be of interest. He was responding to an assertion in Buiter's article: (Pre-columbian native American tribes that attached very little value to the shiny metal.) Jessie noted the exceptions of the Aztec and Maya and could have included the Inca. He then continued:

Oh, perhaps your understanding of early American economic history pivots on the sale of Manhattan island to the Dutch by a tribe of Indians for some beads? A bit selective perhaps, and a narrow experience for a pivotal historical thesis. It may be like basing a general history of European Banking on Wall Street's recent selling worthless CDO "wampum" to the continent's commercial banks. But this does bring to mind a possible advert campaign about early cavemen preferring beads and dollars and euros to gold, a la GEICO. - Jesse)  [Then there was this:]

   Comment 5 from Jesse
    "Perhaps if I phrase it this way it might be more clear.

    In one philosophic sense, gold is indeed a fiat valuation, if all valuations are fiat,
    nothing being essential but air to breathe, food to eat, shelter and clothing in
    roughly that order. All else is discretion.

    Gold, however, may be less fiat, less arbitrary a a money, a medium of exchange
    and a store of value, rather than the essential itself,
    in an other than barter economy. Just as the Aussie dollar or the euro may be less ephemeral than the US dollar,

    This is what is happening. The Bank of England made an error in selling its nation's
    gold 'at the bottom' and will pay a price for this; live with it.

    Oh, and try to move on please, else you may begin to resemble King Canute, sitting
    on his throne at ocean's edge, ordering the incoming tide to stop its inundation.


My own view is that all values are social constructs and are therefore subject to social deconstruction, both in point of analysis and in point of actuality. But it has also been my sad observation that the older the value and the more deeply and widely embedded it is, the more it resists eradication. So, in a worst case of depression combined with monetary inflation, one is likely to be able to find some who will accept gold in exchange for some important good or service, perhaps not at what ever "spot price", if any, might prevail, but likely for well more than the value of the fiat currency that was used to purchase the gold in better times. In less dire circumstances the gold would be likely to have served as a vehicle for preservation of wealth through a period of monetary chaos. Jesse has accused Wm. Buiter of "talking his book" specifically on gold and made a case as to why central bankers hate gold:

Quite a few options are coming due on the US Comex next week, and the bankers may be once more 'staring into an abyss.' Or setting up for a big push lower to 'save the banks.' That would be traditional central banking stewardship of late days.

   "We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake..." Eddie George, Governor Bank of England, in a conversation with CEO of Lonmin, September 1999

"W. Buiter, CBE, Member Monetary Policy Committee of the Bank of England (1997-2000)" Shoulder to shoulder on the brink, eh? That must have been rather intense and worthy for peers of the realm, skinning the specs. Oh, bravo.

People can remain rational and place their trust in the timeless longer than central bankers and politicos can feed them arbitrary illusions and promissories for wealth on the bankers' terms. At least while they retain free market choice.

So having SOME gold or silver, as opposed to having ALL of one's assets in gold or silver, might be  reasonable. Having a house free and clear with some solar and wind power capability and some spot of land on which one can grow a garden might also be a reasonable idea. If one has a well on the property and the ability to operate it with one's own power, that is another plus, as is living in an area of relatively low population density and of above average rainfall.


"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 30th, 2009 at 01:38:18 PM EST
[ Parent ]
Oh, I have some shinies because I know people will trade for them.  My remarks were directed at the GEICO parody on the linked site.  I do not consider gold and securities to be a useful contrast.  My point, and I do have one, is that gold only muscles currency aside in a collapse scenario, and in such a scenario, there are more basic items that are far better investments than gold.
by rifek on Mon Nov 30th, 2009 at 11:07:35 PM EST
[ Parent ]
BTW, Jesse recommends having some of your assets in gold, 10-20% at most.  The rest in the currency of your country.  He advises against trying to "get out in front" of a market collapse via shorts or puts, etc.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Dec 2nd, 2009 at 04:12:03 PM EST
[ Parent ]
Buiter:
Instead the defining property of fiat money is that it has no intrinsic value and derives any value it has only from the shared belief by a sufficient number of economic actors that it has that value.

And like any good bubble, devotees and manipulators can easily massage the apparent value.

Buiter is missing the point that the real value of all fiat currencies is the bubble process itself.

Hence gold, tulip bulbs, securities, and empires - value comes from hard military dominance, soft marketing and persuasion, and social proof and consensus.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Nov 26th, 2009 at 07:55:39 AM EST
[ Parent ]
We can use anything to make a bubble... the reason gold is better than others at bubbles is because is yellow.

I say.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Thu Nov 26th, 2009 at 09:16:41 AM EST
[ Parent ]
Exchange traded gold also carries significant institutional risk. Just when you might be making a killing, the institution could fail. Some gold dealers will hold your precious metals for you, and others have suggested that some such dealers may be engaging in "fractional reserve" gold sales. Physical gold in your own possession can go up or down wrt various currencies as well. The policy of the US Fed seems to be: "Take an assured haircut by holding your dollars or take some risk." Of course one can always take comfort from the fact that the Fed is mandated to regulate the banks and the soundness of the currency.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Nov 26th, 2009 at 01:46:30 AM EST
I've never understood why investors "flee to gold" at times of uncertainty/crisis when gold as so little intrinsic value.  Surely if you are into the commodity speculation business you would be putting your money into the rare earth metals needed for Lithium batteries and electromagnetic engines and generators etc.?

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Nov 26th, 2009 at 07:02:27 AM EST
[ Parent ]
Because other investors do.
by Colman (colman at eurotrib.com) on Thu Nov 26th, 2009 at 07:09:07 AM EST
[ Parent ]
But that's worse than generating a housing bubble.  At least there is some underlying need for new houses (to replace old and cater for increasing population/changing needs) - which, while it can be suppressed at times of recession - will nevertheless gradually eat away at any market overhang when the level of building goes below long term needs.  

No one is "consuming" gold, in the sense of making it disappear, and new stuff is being mined all the time.  There is a limit to how much gold even the glitterati can wear.  So how can a rapid and sustained increase in gold prices not be a bubble - especially if some dealers are "selling" gold they don't actually have?

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Nov 26th, 2009 at 07:25:21 AM EST
[ Parent ]
Gold is special. It glints just so.
by Colman (colman at eurotrib.com) on Thu Nov 26th, 2009 at 07:36:07 AM EST
[ Parent ]
Frank Schnittger:
So how can a rapid and sustained increase in gold prices not be a bubble?

It is a bubble. That's what it's for.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Nov 26th, 2009 at 07:57:10 AM EST
[ Parent ]
One can take physical possession of gold and gold has a long history of retaining value. Buy at the top of the bubble and get burned, but usually gold settles back to a level significantly above the trading range prior to the bubble. Silver might hold its value even better, but the weight of an amount of silver equivalent in value to a pound of gold is over forty pounds, so portability is an issue.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Nov 26th, 2009 at 01:56:22 PM EST
[ Parent ]
Western central banks hold hundreds of year's worth of production/consumption of gold. And much more than any ETF or private entity.

At some point, they will want to kill the gold bubble, for several reasons:

  • just to kill some speculators for the example,
  • to stop capital from running away in useless, non-productive assets,
  • to kill off inflationista scaremongering, in the case of the germans at the ECB (the fed on the other hand, IS an inflation scaremonger)
  • to make a little money for themselves (they have huge unrealized gains in gold)

So I don't think it's a good idea to diversify much into gold, save for a handful of "napoleons". A concerted action by central banks can smash gold to 100$ anytime, within just one week.

Pierre
by Pierre on Thu Nov 26th, 2009 at 09:12:11 AM EST
The Oil Drum | Looking Back at Peak Global Production of...Gold
Yesterday the President of the largest gold mining and production company, Barrick Gold, noted that after ten years of declining production it is time to recognize that the world has seen the peak in gold production. To maintain production ore is being mined with increasingly less gold in it. (The grade of the ore, or metal content, defines whether it is profitable to mine.)


Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Mon Nov 30th, 2009 at 08:14:40 AM EST
And then there is always the little problem that you can't eat, live in it, or shoot somebody with it, and if the bottom really falls out, those are the things that will matter.

Gold is not a currency for today's world. It is for primitive rentier economies. Oh, wait a second...

by kjr63 on Mon Nov 30th, 2009 at 12:23:54 PM EST
For a quarter ounce of gold's worth of dollars, you can buy a Defender short-barreled pump shotgun. Stick a couple shotshells in it, and you can protect the rest of the gold ounces, or the food supplies, or women.

Even better, use another ounce to buy an additional long range rifle and a few thousand rounds.

We Americans have many examples from our recent history. Travel on a horse, with a canteen and a little food and a bedroll, and live off the land. That includes the lesser-minded who think gold is all you need.

There is, right now, a great shortage of ammunition in the USA. It's all bought up. There are many more guns than families.

Americans are jerks, perhaps, but they're dangerous jerks. And they have more weapons than anybody. I think that's a very dangerous situation, and so does my recently discharged Marine Corps son, who recently lived the circumstances of societal disarray we here discuss in vague generalities.

He's very fond of being well-prepared, of course.

Align culture with our nature. Ot else!

by ormondotvos (ormond.otvosnospamgmialcon) on Tue Dec 1st, 2009 at 01:18:19 AM EST


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