An alternative to popular faith
I’m not sure why you like gold. It has minimum utility, and it is not backed by any government (unlike the dollar which is backed by the U.S. government). See: Fool’s Gold Or, perhaps you like paying for storage, insurance and shipping, as your generous contribution to the world’s economy. Or maybe you just like the shiny color.
But, for whatever the reasons, if you already own that virtually useless metal, how about owning some useful metals? Copper has a nice color as does nickel. Aluminum can be shiny like silver. You might enjoy them more, and you still would have the pleasure of paying for storage, insurance and shipping, along with an even better hedge against inflation than gold.
Gold up about 180%
Copper up about 1200%
Nickel up about 1500%
Aluminum up about 700%
Gold is a “greater fool” play, and one day someone will point out that the gold emperor has no clothes. Then, the price will drop like a useless gold bar, and the gold bubble will take its rightful place among other those notable bubbles for tulip bulbs, beanie babies and real estate.
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
No nation can tax itself into prosperity
#Monetary Sovereignty - Mitchell 
So if you had 1 ounce of gold in your hand, how many green slips of paper with the face of George Washington would you take from me in exchange for your gold?
Instead of green slips of paper, can I exchange a new iMac or Windows PC for your 1 ounce of gold?
And if you do decide to trade does that mean that gold is money?
And if it is money, then is gold a debt? (There is no form of money that is not debt.)
LikeLike
At today’s rates I would take about 1,300 of those green slips of paper in exchange for one ounce of gold.
Re. iMac or PC, I might make that trade, if I wanted an iMac or PC. I also might trade a desk, a painting or a tree for an iMac or a PC, but that doesn’t make a desk, a painting or a tree money.
No, gold is not money. Neither are silver, copper, zinc, aluminum, palladium, platinum, lead, uranium or corn. Gold is just a commodity, like the others I’ve mentioned, neither more nor less. I can trade any of them for something else, but they are not money.
No, gold is not debt. If you own gold, no one owes you anything. By contrast, your checking account balance is debt; your bank owes you the money.
Rodger Malcolm Mitchell
LikeLike
Okay, sounds good. Gold is not money.
If green slips of paper represent gold where 1 green slip of paper equals 1 ounce of gold would you trade your 1 ounce of gold for my 1 green slip of paper which you could later convert back into 1 ounce of gold?
And if you make this trade does the 1 green slip of paper represent money?
LikeLike
I’ll let you answer your own question. Substitute the words “chicken livers” for “gold,” and tell me what you think.
Rodger Malcolm Mitchell
LikeLike
Chicken livers! LOL! Okay, but now I’m confused.
If green slips of paper represent chicken livers where 1 green slip of paper equals 1 chicken liver would you trade your 1 chicken liver for my 1 green slip of paper which you could later convert back into 1 chicken liver?
So, you’re saying you wouldn’t make the trade since chicken livers have at least some value (nourishment) over paper?
Assuming that is the case, what you’re saying is if you are looking for a store of value for your money, you may choose gold. But, like any other commodity, object, chicken liver, it may fluctuate in demand and price so you’d have to be mindful of when to “get out” of gold. Much like anything else that you “invest” in. Do I understand that?
I have to admit that I’m not a gold bug and don’t feel we need a gold standard for money. To me, money represents my work. And leaving a commodity in the hands of someone else to manipulate the price means that they have more power over me since they may be in a position to manipulate the price of gold, or rather, the value of my work.
But, I do understand the investment idea or the fear of inflation and thus the idea of purchasing real assets with paper money just to at least hold some value.
LikeLike
“So, you’re saying you wouldn’t make the trade since chicken livers have at least some value (nourishment) over paper?”
No, I’m saying gold is just one commodity, out of the millions in our lives.
“[…]if you are looking for a store of value for your money, you may choose gold.”
Or I might choose chicken livers. But I prefer money as a store of value.
“[…]the fear of inflation and thus the idea of purchasing real assets with paper money just to at least hold some value.”
Gold is not a hedge against inflation, any more than any other commodity in the world. I’d rather have stocks or bonds, as they pay interest/dividends and do not cost for storage, shipping and insurance.
In 1980 gold hit about $1,000 per ounce. Today it’s about $1,300, minus holding costs. If instead of buying that ounce of gold, you had bought a 30-year bond, paying a paltry 3%, you would have $2,400 today — and no holding costs.
At a more reasonable 4%, you would have $3,200 today. Given the millions of buying options available to me, gold is way, way down the list. Gold is a sucker’s play.
Rodger Malcolm Mitchell
LikeLike
Rodger,
I was going over some old records this weekend. I own some rental units. I rented one apartment for $265 in 1972. That unit now rents for $2,000. Same unit, same location. The difference: inflation. I know (and agree somewhat) with your position that oil is a major cause of inflation, but I find it hard to believe that you can account for a nearly 800% increase in the market value of an apartment because of the higher price of oil. I’m convinced that much of the increase is due to the expansion in money supply over the intervening 38 years.
If this is true, it’s also clear to me that inflation forces individuals to speculate with their money in an attempt to maintain the purchasing power of their money over time. This speculation is unproductive as it leads for example to the buying and hoarding of gold, silver and other hard assets along with stocks etc. The necessary balance between enough money for prosperity, but too much money leading to long term devaluation of the currency (as illustrated above with my rent) is not discussed enough here.
LikeLike
Jason,
One of the biggest problems in economics is people beleive their intuition rather than facts. I know of no other science like that.
As you have seen on other posts on this blog, there is no historical (post 1971) relationship between federal deficits and inflation. INFLATION/DEFICITS
Rodger Malcolm Mitchell
LikeLike
Rodger,
You are distorting my point. In 1972, the price of a barrel of oil was about $18. My rent was $265. Today, the barrel is about $70 while my rent is $2,000. Oil has gone up less than 4x while the rent has gone up 8x. There may be no direct connection between deficits and inflation, but clearly the increase in the price of oil doesn’t account for all the cumulative inflation.
Further, if we take into account all the deflationary influence of technology and the opening of the former communist bloc, the fact that prices have gone up so much in the past 40 years needs to be explained and oil doesn’t account for more than a fraction of it.
This chart shows that in the past four decades, M3 is up 10x (http://upload.wikimedia.org/wikipedia/en/9/95/Components_of_the_United_States_money_supply2.svg) Can I “prove” there is causation there? No, but it does appear that the increase in M3 tracks inflation better than the increase in oil.
LikeLike
We seem to have drifted a long way from the original subject of this post, which was that gold is a bad, long-term investment.
M3 is a limited measure of money, which does not include T-securities, commercial bonds and many other types of money. I make no claims, one way or another, about M3, because it is so narrow, and is not even published any more.
I must confess there are no good measures of inflation, but the amount you charge for rent is a particularly terrible measure of U.S. inflation. CPI is better, though still deficient.
Long term, the economy grows, the money supply grows, the federal debt grows and inflation grows.. Long term, they all grow. But what causes what?
For an immediate cause and effect, federal deficit spending does not seem to correlate with inflation. This is important, because debt hawks claim otherwise.
The one variable seeming to have the most immediate effect on inflation is oil. And I have published graphs seeming to show this.
Rodger Malcolm Mitchell
LikeLike
Apologies for getting off-topic but your blog is not really set up to field general questions/comments so one has to just pick a topic and reply to post a thought.
Inflation and money supply are both hard to measure but a fair minded observer cannot dispute that there has been serious dollar devaluation over long periods of time that goes well beyond the increase in the cost of energy. As mentioned above I feel this leads to unproductive speculative behavior in attempting to protect one’s portfolio. At the same time it eats away at the savings of those who don’t try.
LikeLike
Jason, you might find this graph interesting:
Rodger Malcolm Mitchell
LikeLike
That CPIAUCNS looks like the cumulative affect of interest on the debt..
LikeLike
Ken,
The CPIAUCNS reflects the Fed’s inflation goal of about 2%-3%. While interest on the debt adds to the money supply, and therefore is inflationary, the Fed responds to inflation by increasing the reward for owning money (interest rates), which is anti-inflationary.
That is why there is no direct relationship between federal debt (and federal interest payments) and Inflation.
Rodger Malcolm Mitchell
LikeLike
OK, have already responded on some of your other posts but now I know you’re a Fed shill.
You’ve carefully cherry-picked your time frame, deliberately attempting to side-step the reality of gold ownership over the long term.
I doubt you’ll publish this or my other posts but on the off-chance you have some ethics I’ll try anyway…
“But I prefer money as a store of value.” And yet you point to other bubbles that have popped?
US Dollars or any other fiat currency, or even a backed currency, is exactly that same in the sense that it’s only ‘value’ is that which people assign to it.
The big difference between “dollars” (the paper variety) and gold is that gold has been a reliable means of exchange for at least 3,000 years, probably a lot longer.
In the meantime hundreds of fiat currencies have come – and gone again, rendered worthless due to inflation. Heck, even the Roman and similar coinage suffered the same fate, as dishonest rulers attempted to debase the gold and silver content of the coins.
I prefer the Austrian definition of money, merely the most exchangable commodity. That today we use fiat dollars for that is a very bad warning sign, not a break from that reality.
Chicken livers don’t last long, even when freeze dried. Nor are they very valuable compared to their size and weight.
Gold has long been the ultimate money because it fufills all the requirements of the most exchangeble of commodities.
It’s divisible, ie you can cut a corner off without reducing the overall value (you can’t do that with diamonds for example).
For it’s size and weight it’s extremely valuable, making it easy to transport. You can put enough coins in your pocket to buy a new car. Try that with chicken livers.
It’s pretty much impossible to reproduce, though some limited mining continues. That ensures it holds it’s rarity far better than chicken livers or fiat dollars.
Unlike chicken livers gold does not rot, nor does it rust, again making it an excellent store of value.
You can dig up some ancient coins from pre-Roman times and if they’re gold then they’re still valuable. You can’t say that for any fiat currency more than about 50 years old – and even then the design has probably changed, rendering the old paper worthless (if it hasn’t already rotted away)
The idea of gold is NOT that you eat it during hard times, merely that no amount of paper printing or button pushing can devalue it. If things get really bad you just hold onto your gold, wait for things to get better and you still have that value. That doesn’t work with paper money.
You can’t eat paper money or digits on your screen either.
I currently live on the island of Borneo. I could take an ancient 1000 year old gold coin from anywhere in the world and still buy stuff here today.
In short, no commodity – and certainly no fiat currency – can even begin to come close to the properties of gold as being the ‘most exchangeable commodity’. That’s all money is, the means of exchange.
Your comment that ‘gold isn’t backed by a government’ nearly made me spill my coffee! Being backed by government is no virtue, quite the opposite.
As for gold being in a bubble, sure that can happen. Arguably it did happen in the 80s.
However until I see more than a tiny percentage of people in the US owning gold I don’t thing I could call this a bubble. Pick 100 people randomly off the street and ask ‘Do you own any gold coins or bars?” and it’s quite likely that of that 100 NONE of them do. Hardly bubble territory.
Now add that central banks around the world are increasing their holdings, China and India are after more etc. Gold still has a long way to go, regardless of any bumps along the way. NOT as a means of selling to a bigger sucker, though that’s obviously a possibility, merely that fiat currencies have a long way to fall – all the way to Zimbabwe levels.
Until recently do you know how many people in Zimbabwe got food? Panhandling the local rivers for gold. Give that some thought – but then again why would you, seeing as you’re obviously set in your faux beliefs?
Alan
LikeLike
Pig,
Although you seem to have learned somewhere that insulting your host is an intelligent and convincing way to present your ideas, I’ll respond briefly.
You said, “The big difference between “dollars” (the paper variety) and gold is that gold has been a reliable means of exchange for at least 3,000 years, probably a lot longer.” No, that is not the big difference: Gold is a limited commodity and Monetarily Sovereign dollars are not limited. (As for “reliable,” I’m not sure what evidence there is for reliability.)
We went off the gold standard, because a growing economy requires a growing supply of money, and our money supply was limited by the accident of how much gold was being dug from the ground. Had we remained on the gold standard, our money supply would be minuscule, as would our economy. We would be monetarily non-sovereign, broke and subject to the whims of the French or whoever owned the most gold.
Because gold has very little intrinsic value, it’s monetary value is determined exactly the same way a dollar’s monetary value is determined — by the markets.
The PIIGS are in desperate trouble because they are monetarily non-sovereign, and so are unable to create the money to pay their bills — exactly the same scenario as being on a gold standard.
And there is one other difference between dollars and gold. Dollars are backed by the full faith and credit of the United States. Gold is backed by nothing. It’s just another commodity, neither better nor worse than platinum, palladium, uranium, copper or any other metal — oh, maybe worse, because most other metals at least have a use.
Rodger Malcolm Mitchell
LikeLike
Wow, you published!?
Thank you :o)
As a *means of exchange* the only major difference is indeed that one has thousands of years behind it as a track record, the other is simply yet another example of a fiat currency, none of which has ever lasted for long as rulers invariably over-do that whole inflation thing.
Yes, the *other* big difference is that one is basically monopoly money and can be printed at will, while the other is somewhat fixed and thus reliably valuable. That’s the very crux of the issue so I didn’t belabor it in every paragraph.
You question gold has been reliable? Aside from the brief and self-correcting bubble of the 80s, not to mention FDRs villiany in attempting to steal the gold of the American people, when has it ever NOT been a reliable store of value and means of exchange? We both know it has been for literally thousands of years.
The ONLY times it’s experienced problems, ie those mentioned, was as the world turned for the first time ever into a global arrangement of fiat currencies. That’s never happened before in history so yes, there was a mania surge and then a confused acceptance of the very fiat system now crashing down around our ears barely 40 years later.
Those who rushed into gold were correct in their knowledge that NO government or state can be trusted with fiat currency, that they ALWAYS self-destruct the economy. There’s never been a time in history when they haven’t. What they got wrong was the timing, for the fiat dollar has survived a lot longer than it should have.
That’s due to the “petrodollar” and “world’s reserve currency” status, mainly due to being the only large industrial nation relatively unscathed by WW2, plus a deal with Saudi Arabia that oil be priced only in dollars.
Basically the world went along with a very dumb idea, which worked in the short term but like every fiat currency before was and is doomed to failure, this time on a global scale.
The dollar/Fed/US government have effectively managed to keep the fake money machine going via exporting inflation across the entire freakin’ planet. They’ve used it like a giant heat-sink, delaying (not preventing) the inevitable meltdown for a long time.
The Euro is pretty much the same, with the EU hoping to use the entire EU itself as another giant heatsink, maybe even grabbing some of that reserve currency scam for themselves.
So sure, some ups and downs during the transition – but gold is again proving itself the ultimate store of value. ‘Real money’. The most exchangable commodity of all.
(Yes, energy is the ultimate currency but try carrying $1000 of oil around or hiding it in your home?)
In short, gold is back.
It never went away, it’s just had a few decades of the seriously misguided claiming we don’t need it no more, “this time it’s different” and your ‘SM’ thing.
Your points are contradictory. You claim the US can just print as much as it ever needs, with the only constraint being inflation, yet inflation can be “controlled” with interest rates.
Go on then?
Print enough money so we can all be rich, while ‘controlling’ inflation. See how that works out for you?
We both know it wouldn’t.
Heck, look around you – it’s not.
Printing money IS inflation – the only “control” element is hiding it under the rug as debt to pay off sometime “real soon” later.
Today America’s debts are greater than all the cash reserves in every central bank on the planet – including America’s.
You describe it as merely a scorecard of the money created – but it has to be either paid back (and already the interest costs exceed federal tax income) or defaulted on.
Default worked last time; America just said ‘We aint paying gold’. Do you really think America will get away with that this time?
Today America is NOT the only large industrial nation still standing, it’s NOT an industrial powerhouse with cutting edge technology.
Nothing like it.
It’s a wreck, the world’s greatest debtor, the world’s highest incarceration rate, major unemployment, a ruined industrial base, almost entirely reliant upon imports, lashing out militarily in the false believe it can scare people into wanting it’s paper money.
Deficits, let alone defaults, damage that ‘perceived value’ thing. Who wants dollars once they start dropping like a stone in value? Your idea that the government can just print their way out of trouble is so wrong it’s left.
Alan
LikeLike
” . . . when has it ever NOT been a reliable store of value and means of exchange? “
Today, gold is not a means of exchange. It is just another metal.
” . . . NO government or state can be trusted with fiat currency, that they ALWAYS self-destruct the economy.”
When gold was a currency, it was fiat. All money is fiat, by definition. Gold did not prevent the Great Depression.
“Print enough money so we can all be rich, while ‘controlling’ inflation. See how that works out for you?
No, create enough money so we can emerge from the recession. In the past 40 years, the so-called “debt” has increased an astounding 3,400%, yet there has been no relationship between deficits and inflation.
In 1941 we adopted the Bretton Woods system, a form of gold standard. It did nothing to prevent inflations or recessions.
Nevertheless, if you feel comfortable with gold, you should buy and store it. Much good luck to you.
Rodger Malcolm Mitchell
LikeLike
“Today, gold is not a means of exchange. It is just another metal.”
False. It’s still “the most exchangable commodity” short of paper currency (which started off as receipts for real gold)
Central banks around the world are now stocking up on it, suggesting they’re remembering gold’s historic role as raw money too.
You say gold has no real use. Sure it does; are you seriously suggesting that an incredibly mallable metal of extreme conductivity that never rusts or corrodes, even in salt water, has no use? The only reason we don’t make more use of it is because it’s so rare and valuable.
(As an aside I have my own fishing boat and can attest that ‘stainless steel’, upon meeting salt water, isn’t)
You’ll also find that where extreme performance is needed gold IS used, for electrical contacts etc.
You say gold was fiat? Nope, gold was valuable with or without the say so of some clown in a gown or pointy hat. Hint – if you have to pass a law to declare something valuable, it’s not. No-one ever needed to pass a law making gold valuable.
“No, create enough money so we can emerge from the recession”
So tell me, what do you think created the recession?
“Greed”? “Corruption”? “Capitalism”? “Speculators”?
Nope.
Bad investments as a result of overly cheap credit, that is to say the government/Fed “business cycle” (which has little to do with business)
Left alone the markets can go through localised and minor swings, which rapidly self-correct.
Nothing like the Great Depression or the current Greater Depression in the making.
You say gold didn’r prevent the Great Depression in the 30s. Of course it didn’t, the Federal Reserve was created in 1912 (1913?), meaning there was no real gold standard.
(Any standard, gold or otherwise, controlled by government isn’t worth the paper the “laws” are written on. The only real laws here are economic laws, which the Fed attempted to mess with, creating the Great Depression!)
“In the past 40 years, the so-called “debt” has increased an astounding 3,400%, yet there has been no relationship between deficits and inflation.”
Of course not, as the debt has continued to grow, without being paid back in liquid currency.
If you pay it back you face massive poverty, both in the cost of paying it back and then the resulting inflation. Government to govermnent debt can be ignored, as it’s just meaningless bookkeeping. That doesn’t work so well for “entitlements” or foreign debt that carries interest.
“In 1941 we adopted the Bretton Woods system, a form of gold standard. It did nothing to prevent inflations.”
Of course not, it was a fake standard, so fake the US ended up defaulting on it.
“buy gold and store it”
I do.
AC
LikeLike