patrick.net

Gold did just fine in the 70s without countries reverting to the gold stanard. Side note: It figures...Patrick shut down the old forums a day before gold smacks its all time high. I waited 2 years to make the "I told you so" post to certain people.

Gold's inertness is what makes it a monetary metal. If it ever had real industrial applications that allow us to destructively consume it, it would never be money.

But for everyone that argues that side of the coin, I still can't understand why they don't buy silver. It's irreplacable in several industrial applications and those applications just keep growing.

Gold is pretty. It was used in ancient coinage and artifacts because it was durable and attractive. Gold could not be faked in the ancient world, and thanks to Archimedes*, even adulteration was straightforward to detect. Our present fascination with gold is probably a holdover from the monarchs of prior ages. The kings of Europe had gold in their vaults, so therefore it must be desirable for the common man as well. People tend to ignore that the kings also had vast lands comprising farms, labor and natural resources, and that this was the source of their ongoing wealth. I tend to agree that gold is largely useless in any crisis. Its only value is as a universally agreed-upon medium of exchange---a sort of super-fiat currency/commodity for purely historical reasons.

* If you're confused, Google "Archimedes gold crown Eureka".

Don't worry oak, I remember you recommending gold and silver last September when gold was 25% lower, and silver 45% lower.

I did buy a small amount of silver, and meant to buy more, mostly because of its ratio of price to gold has been far below the historical average, but chickened out after it crossed the $12 range. Yeah, I know, bad move...

I am not a scientist, so by all means enlighten me. The largest industrial use of silver is in the process of developing photographs, right? I had a difficult time justifying buying too much silver for the same reason as gold given the quickly growing popularity of digital cameras.

Do you put any value in Marc Faber's prediction of a gold and equity pullback, as the dollar bounces off it's lows?

Photography could drop to zero and Silver will still be consumed more than it is mined. Silver is the best conductor of electricity making it irreplaceable in electronics. We use minute quantities in every electronics device. So minute, that we never really bother to recycle them. Silver is also an amazing catalyst. It's used in anti-microbials. If you run a patent search on Silver, the results are ridiculous. If the rest of the world decides that they want an ipod, computer, flat panel tv in their home, you can kiss the above ground supply of silver goodbye. It's already down 80% for the century and we'll get through the next 20% easily within the next 15 years. At that point, I predict a massive price spike in Silver.

As far as Marc Faber goes...I take all his predictions very seriously. I learned my lesson when he called the dollar rally a year ago and the S&P rally this march. He's a huge gold bug and has been since 2001. Can they pullback? I have no idea. I'm not much for timing anything, in fact, I have absolutely no ability to even make predictions under a year. I simply understand the law of supply/demand and inflation enough to know that 5 to 10 years down the road, the dollar is worth less while gold, silver, and oil are worth more. I don't really care much for the inflation/deflation debate anymore. What I do know is, as of today, it does not matter where anyone bought gold, it's higher than when they bought it. What I do know is that I'm literally batting 1000 for 10 months straight. Not a single investment I have made has lost money since last November. What I do know is, the Zimbabwe stock market only goes up. Lets face it, I'd love to pump up my ego....but I can't be that damn good. I seriously do believe my batting average would drop to well below average if Ben Bernanke would have never instituted quantitative easing. In my opinion, Ben Bernanke, Hank Paulson, Larry Summers, Tim Geithner, they make investing easy. Just buy something that has solid long term supply/demand fundamentals and watch it go up.

Speaking of Faber, I bit the bullet on Natural Gas a few weeks back after reading him hyping it up.

I like gold, but what is the right price for it?

No one has ever answered that question convincingly. There's the cost of getting the next ounce of gold out of the ground, OK, but why get it out of the ground at that price?

Things that pay rent, or a dividend, or even a fruit tree, I know how to value those: the dollar value of what it produces per year divided by the current interest rate. Oil has a clear value in its energy, which is useful for doing work. The cost of the work you can replace with oil -- that's oil's value. But gold does not replace anything, except dollars, and then it gets kind of circular. It replaces the dollars people are willing to pay for it. But the dollars also replace the gold people are willing to pay for them.

So I'll just post a nice picture of a gold coin, for no reason other than to show off that you can now post pictures in comments. I think there are still some bugs. Let me know: p@patrick.net

Patrick. I dont know what you are getting at. The cost of locating, mining and refining Gold depends on many factors from country, location, labor costs, equipment costs, taxes and regulations. Workers get paid whether Gold is recovered or not. Many Gold mining companies are spending about $550/ounce yield in open pit mining ventures. Other recovery methods cost higher or lower depending on costs. Some mines are closed until the cost/benefit ratio improves. One thing to ponder is this. In The USA, some Gold recovery firms do NOT SELL the GOLD. Instead they place it in underground vaults as equity against low interest bank loans. Gold can be seen, touched, weighed, measured and assayed and its only value is related to what people think it is worth at any one time, simlar to houses, but termites, rust, fires, storms, earthquakes and floods don't affect Gold.

Why is this Gold not sold on the open market? The US government, conveniently, gets involved in ANY amount of gold recovered in the USA (greater than an ounce). The fees, paperwork and adminstration BS forces Gold mines to develop alternative strategies.

You can NOT eat Gold, use it as medicine or do much anything with it other than look at it and trade it. It is EXTREMELY expensive, but unlike the diamond monopoly there is only ba finite amount of Gold. Scientists can synthesize diamonds reltively inexpensively, but Gold can only be mined and traded and sometimes used for plating, dentistry and jewelry. Thats it.

Now---if you buy GOLD bullion, like Mexican pesos which were minted 60 years ago and placed into circulation, it IS theoretically possible that educated people could use gold coins as barter, since its density and value does not change, but what about the Main street pirates like who want to steal what you have by force?

They can only be thwarted by distance---Move to Antarctica and live with the Penguins, ice and Polar Bears , or you can defend yourself.

To defend yourself impies requiring a force multiplier since ten bad guys could want to steal the Gold from just litle old you.

What is the easiest to locate force multiplier? You have it firearms---Does this explain why there is a shortage of ammunition.

Now the question becomes what is the REAL value of GOLD, if you have NO ammunition to load into a firearm?

So in this scenario, on a micro economic scale, weapons and ammunition have more value, because they can keep you from getting killed. Also food, water, medicine, simple hand tools, shelter, clothing COULD become more valuable than Gold if some people decided to kill for PERCEIVED precious commodities.

Today, there are big sales in survival food storage, emergency shelters and other methods to live independently without depending on the economic infrastructure. You should know that a case of ammunition used as barter for food and water has MORE VALUE THAN GOLD! Many people are already gearing up for alternative barter systems, developing food storage plans, cannning, solar powered freezers etc.

I know several who have already built fortified structures as semi-permanent shelters for a long economic downturn!

Land sales in remote areas has increased. All one needs at minimum ---is a large enough Motor Home (they are very cheap in todays market---as houses not land yachts), provisions, supplies and defensive strategies to live independently for long periods of time.

I know plenty of people who are hoarding ALL of these items. The general feeling among them is that they are responsible and accountable for what they do---but the government institutions and the financial sectors have been lying to them. they just want to be left alone. and they will do well. It's the collectivists who want them to "share" what they worked for with miscreants and the lazy.

Hers is a compromise between Gold as a commodity and as a defensive tool.

It didn't upload---trying again

It didn't upload---trying again

Patrick, it looks like a bug. I tried a GIF and JPEG...diferent sizes. nothing works Here is a tiny gold necklace charm.

Damn, works on my computer, but not my wife's. The image actually does upload, but somewhere the link to it is getting lost.

Here's a spot gold chart...do I see any downside risk? Nah...

The few people I know connected to mining industries say it's very hard for small investors to forecast the direction of metals. Besides, it's a market whose price is routinely manipulated--and not for the benefit of some guy hoarding 100oz of gold. I probably sold my metals too early, but I find calling a top on these markets next to impossible.

KurtS says

(img tags are stripped out when posting)

Yes, that seems to be the case for other people, but not for me. Maybe admin has some special privileges. I will try hard to debug that today.

I see that CBOEtrader has already addressed some of my concerns, ie--does anybody suppose that pegging our dollar to gold would somehow prevent Wall St. leveraging and speculative activity? Of course not! Or, how about the effect on central bank reserves due to fluctuations in gold price? In the 19th C., there were several currency crises due to fluctuations in silver/gold that nearly crippled the US Treasury. And, can anyone also predict how much business development there would be if every investment dollar were matched to a gold equivalent? Or, perhaps consumers buying on "credit" that must be matched dollar-for-dollar to gold? Obviously, economies cannot function without some leverage--that's not the real problem.

Yet, when countries had their "gold standards", that somehow did not prevent rather foolish market speculation and monetary policy. If you're curious, dig into history before the 19th C. for Europe and you'll find even more examples. As far back to the Roman empire, governments adjusted/debased currencies on whim to fund wars--or simply line the pockets of a greedy king. Gold might look like a solution, but a gold standard alone does not address the real problem of unchecked leverage.

OK, I definitely fixed it. I created my dummy user "badraig" and posted an image as him.

So everyone should be able to include images in comments now. Please let me know if other bugs: p@patrick.net

KurtS says

Yet, when countries had their “gold standards”, that somehow did not prevent rather foolish market speculation and monetary policy. If you’re curious, dig into history before the 19th C. for Europe and you’ll find even more examples. As far back to the Roman empire, governments adjusted/debased currencies on whim to fund wars–or simply line the pockets of a greedy king. Gold might look like a solution, but a gold standard alone does not address the real problem of unchecked leverage.

Kurt is right. Gold is great for limiting gov't ability to print new currency, but it definitely does NOT stop the boom-bust cycles. There was the South Sea bubble, and the Mississippi bubble. And the tulip bubble.

We had tons of booms and busts with gold, and that was a major rationalization for going to paper money to begin with.

The problem is DEBT, not paper currency. You can promise to pay an infinite amount of gold. Or look at it this way: one share of stock gets bid up to one ounce of gold. But there are a million shares. That is an implied million ounces of gold, but the gold isn't really there.

Totally agree with Patrick and Kurt here. A gold standard could limit inflation greatly, but would not limit booms and busts due to leverage.

Here is a graduate econ studies paper that discusses the money supply fluctuations resulting in the early tulip bubble, south seas bubble, and the mississippi bubbles--all during a time of a world wide gold standard.

http://mises.org/books/bubbles.pdf

It is very interesting if you have the time to go through the 147 pages of it. I particularly enjoyed reading the story of John Law's rise to power in France. He sounds like my type of guy.

elvis, I applaud your way of thinking and encourage you to continue along this process.

"The bubbles stated above had nothing to do with the government “running the presses,” and debasing their countries currency."

This statement is simply not true. From the paper I posted above...

"The three speculative bubble episodes explored in this
paper, besides having the obvious similarity that they all
occurred, share the common trait that a government sanctioned
bank, along with government policy, created large increases in
the supply of money in each economy, prior to and during these
episodes. Each episode was in its own way different,
especially the Tulipmania. However, the results were the
same: boom, speculation, crash, then financial pain."

Be aware that this was DURING A WORLD WIDE GOLD STANDARD. In fact, the Tulipmania craze happened BECAUSE of the gold standard. Basically the Ducth government had the most sound banking system of the time, thus attracting gold (money) from all over the world. Flush with capital to loan out, the Dutch banks loaned money to speculators who bid up the price of the rarest and most sought after plant of their age: the tulip bulbs. So ironically, it was the soundness of the Dutch banking system that led to the increased money supply, causing the speculative bubble and all the economic wreckage associated with the bust.

I'm not saying a gold standard isn't a good idea. I am simply pointing our that a gold standard will by no means usher in a utopian era.

In the case of the south seas and Mississippi bubbles, the governments of their time mandated the stocks of these companies to be legal tender, thus creating the first Keynesian experiments known to man, 200 years before Keynes wrote down his famous economic theories. The new world fascinated people of the late 17th and early 18th centuries in the same way that the internet fascinated investors in the late 1990's. Using this phenomenon to their advantage, the governments of the day (the kings) found a way AROUND THE GOLD STANDARD. This was of course, a disaster on a historic level.

Just sayin.

elvis says

Patrick - I don’t understand what you are trying to get at: “You can promise to pay an infinite amount of gold” For what, and why would anyone promise to pay an “infinite” amount anyway?

And finally, I don’t understand your logic : how would the existence of a million shares of stock IMPLY the existence of a million ounces of gold? Help me out here. Thanks Elvis

Debt is a promise. It can be a promise to pay dollars, or a promise to pay gold. People count debt like they count money. Don't believe me? Got money in the bank? Do you really? Or does the bank just have a debt to you?

Even with a gold standard, a promise to pay gold is considered money. The promise is not limited by how much gold there is. That's what I meant about a promise to pay an infinite amount. If people believe it, it's money.

People also count stock like they count money. If someone sells a share of stock for one ounce of gold, everyone else with a share also thinks they can get an ounce of gold for their share too. It's implied.

Think about the idea of collateral in a trading account. Since everything is marked to market daily, your total portfolio is "worth" the midpoint between the last quoted bid and offer prices times the number of shares or contracts you own times the product multiplier (which would be 1 for a stock, 100 for most listed options, etc.). Now, let's say a company issues 100 million shares at $1 each, for a book valuation of $100 million. Let's say the CEO/owner has 80 million shares, 10 million are reserved for employee stock options, leaving only 10 million left to be freely traded in the open market. If a few investors decide to bid the small number of shares available up to $10 each, the market cap of the company would be $1 billion now instead of $100 million where it started, gold standard or not. These shares, marked to market at $10 each now, may be used by the CEO to "purchase" $720 million (this is his marked to market "profit" in his trading account at Goldman Sachs, or Merrill Lynch, or wherever) of any other financial product in the world. Thus $810 million of new "money" was created out of an initial $90 million of aggressive private investor capital...but the gold is nowhere to be seen, gold standard or not. This was the point he was trying to make earlier. When it comes to the financial markets, you only need collateral, not actual money to purchase something. A stock times its marked to market price (even if the price is irrationally exuberant) counts as collateral equal to actual dollars.

Regardless of a gold standard or not, the stock market could fall, resulting in a chain reaction of investors selling to cover their collateral losses--none of which is ever represented by real money, but can be used like real money--and a bust ensues.