Why There is Fear and Resentment of the Power of Gold to Discover Value in the Real Economy

[Joanne98]

There were a few questions raised about the note on the long term chart of the SP 500 deflated by gold which was posted last night, and which is reproduced here on the right, which read "This is why the financial engineers like Bernanke hate and fear gold; it defies their plans and powers."

The chart shows something that most investors have suspected. There has been no genuine recovery in the price of stocks since the decline that cannot be fully explained by the monetary inflation of the dollar, as can be discovered by the ultimate store of value, which is gold.

I thought that this was a fairly straightforward observation, but it apparently jarred a few people and their thinking. So perhaps we have some new readers who are not familiar with the long standing animosity towards gold that is uniformly expressed by all those who promote centralized command and control economies, from both the left and the right.

Can any astute observer doubt the Fed's desire to act in secret and privacy? Their obsession with this is almost unbelievable and beyond comprehension, unless one understands that they are in a 'confidence game,' and use persuasion and even illusion to shape perceptions, especially at the extremes of their financial and monetary engineering of the real economy.

http://jessescrossroadscafe.blogspot.com/2010/05/why-financial-engineers-fear-and-even.html

[orwell]

1. There is no "power of gold"...

...just as there is no "power of money". These are all abstractions.

I can't eat gold.

[customerserviceguy]

2. You can't eat paper, either

And if you're like most Americans, you really don't have a lot of that paper in your current possession, your money is a bunch of electrons in the memory storage of a group of computers. It can be wiped out even quicker than someone can burn a pile of your paper dollars.

I'm also sorry to disagree with you on your other contention, money and power have gone hand in hand throughout the history of human civilization.

[golfguru]

20. But you can eat cereals, chips & peanuts

So I will stick to General Foods, Kellogs, P&G and the like.
People need and use their products all the time, non-stop.

[Joanne98]

3. That's true.

[girl gone mad]

4. As long as the Fed and various sovereigns keep gold locked up in their vaults..

gold is money.

You can argue otherwise, but actions must count for something. If gold were a mere commodity, central banks wouldn't be hoarding it and manipulating it as they do.

I don't own gold and think it may be a crowded trade right now, but Jesse's logic is inescapable.

As far as safe havens from fiat currency devaluation go, gold is probably not a bad bet. I have my own safe haven but it's something I know about as well as anyone in the world so I wouldn't recommend it to the average investor.

[pokercat999]

5. Gold is a fiat currency. nt

[girl gone mad]

6. True in some sense, but..

Governments aren't printing it.

[Art_from_Ark]

8. By definition, gold is NOT a "fiat currency"

A fiat currency is one that is not backed by specie; rather, the issuing authority sets its extrinsic value, but the currency itself has little or no intrinsic value. A ten dollar bill and a hundred dollar bill have the same intrinsic value, but the issuing authority decrees that one is worth 10 dollars, and the other is worth 100 dollars, that is, the extrinsic value of the respective notes is declared by fiat. Gold, on the other hand, has a value that, in free market countries, is independent of government decree.

Theoretically, a gold coin can be "fiat" if its face value exceeds its intrinsic (gold) value, but as far as I know, there is only one gold coin in the world that fits that description-- the 100,000 yen gold coin issued by Japan, which currently has a gold value of only about 70,000 yen.

[eridani]

9. The price of gold has zero relationship to its extrinsic value

It is subject to the same speculative bubble horseshit that every other medium of exchange is.

[Art_from_Ark]

10. Oh, for crying out loud

How can you discuss this when you don't even know the difference between extrinsic and intrinsic value?
Extrinsic value-- the value above the intrinsic value.
The market value of gold is based on its perceived INTRINSIC value.
A collector-type gold coin has extrinsic value because it is worth more than the gold value. Gold bullion, theoretically, has no extrinsic value.
Geez.

[eridani]

11. So why are gold prices now forming a bubble?

That's basic herd psychology and idiocy, which have nothing to do with value of wither sort.

[Art_from_Ark]

12. Reaching a new high is not the same as being in a bubble.

If you had a better understanding about the history of money, you might have a better clue about why there is a lot of interest in gold today. I tried to explain it to you in another thread, but you do not seem to have the ability to grasp the concept of precious metals and how they are used as monetary media, rather than as currencies, in today's economic systems.

You also do not seem to be able to understand the concept behind Gresham's Law, which holds that when "good" money (backed by precious metals) is circulating alongside "bad" (unbacked paper and base metal) money, the "good" money will be taken out of circulation. I saw that first-hand back in the '60s, when silver was removed from all coins except the half dollar. The new dimes and quarters, made of cheap base metal and having an intrinsic value far less than their face value, circulated, while the silver coins (including the new half dollars, which had 60% less silver than the old half dollars), were snatched out of circulation. Within 4 years, essentially all the silver coins, which had been produced in the billions just a few years earlier, were nowhere to be seen.

Today, the intrinsic value of the 90% silver dimes dated 1964 and earlier is about $1.20. The intrinsic value of dimes dated 1965 and later is maybe 2 cents.

[eridani]

13. Precious metal as "backing" for currency is nonsense

What backs a society's currency is the sum total of its human and natural capital.

The only thing I care to know about coins is if I put some into a vending machine, can a get a Coke and some chips back out of it. Bimetal wins on that score. Numismatics is interesting, but its subject matter is of no more intrinsic worth than antiques or collectibles.

[Art_from_Ark]

14. Wrong again, on so many counts

Your contention that silver coins cannot be used in vending machines is silly, because the current clad (not "bi-metallic") alloy was chosen as a replacement for the silver alloy in large part because it closely resembled the properties of the silver coins, making the clad coins useable in vending machines. The coins rejected by your vending machine were in all likelihood pure nickel coins from Canada, which are magnetic, and are thus automatically rejected by US vending machines.

"Bi-metallic" coins are coins which have have a core of one alloy, surrounded by a ring of another alloy. The 1- and 2-euro coins, Thai 10-baht, and British 2-pound coins are all examples of bi-metallic coins.



Your contention that merely a society's "sum total of its human and natural capital" is what backs its currency is simplistic, since currencies sink or swim based on a number of internal and external factors. The currencies of Mexico, Argentina, and Brazil, for example, have all at one time or another crashed without a major change in their "human and natural capital".

One cannot discuss currencies without understanding the history of precious metals and their role in supporting monetary systems. Your contention that precious metal backing is "nonsense" is misinformed, to say the least. Here are some Ithaca dollars. You can use them to buy yourself a clue. According to you, they should be as readily accepted in Seattle as they are in Ithaca.

[eridani]

16. The external factors are useless sociopaths fucking with countries that aren't imperial powers

This has nothing to do with real value. The only value that matters is use value. If you can't eat it, breathe it, drink it, wear it, build shelter with it, get from point A to point B with it, or burn it to keep warm, then fuck it.

BTW, the whole point of Ithaca dollars is that they support the particular community of Ithaca, and quite well at that.

[Art_from_Ark]

17. It has occurred to me

that what you have been saying is almost straight out of the "Marxist economic geography" school of thought, which had its basic roots in the Myrdahl-Hirschmann, "north-south", and related theories of the late '50s. The problem with this school of thought is that its adherents became so convinced of the correctness of their theory that they basically blocked out whatever conflicted with it. While I tended to agree with some of the basic ideas, such as "north-south" economic conflicts, the overall gist of "Marxist economic geography" is a little too dogmatic and fails to take a more holistic look at human economic history as something that involves more than just the haves subjugating the have-nots.

As for your utilitarian view of things, I am glad that the ancient Greek artists and writers did not share your view, nor the great Renaissance painters, the great composers, the great classics authors, et al since their works cannot be "eaten, breathed, drunk, worn, turned into shelter, used for transportation, or burned to keep warm". Well, OK, books have been burned, maybe not always to "keep warm", but I won't get into that.

[eridani]

19. Art is creating something, and once we take care of the basics we all want to do it

Speculators and financial manipulators create nothing, period.

[Art_from_Ark]

21. Is a beautiful gold coin not art?

Really, there are quite a few people who appreciate gold for its beauty. Why do you think gold jewelry is so popular? And there are quite a few people who appreciate both the beauty and history of early American coins, gold and otherwise. For example, this coin is quite interesting from both perspectives



It features a young Lady Liberty (symbolizing the nascent United States), looking toward the future with an expression of optimism. It has a certain allure for people who appreciate things besides utilitarian products, intangible things, like beauty, history, and the craftsmanship of 18th century designers.

As for speculators, no one is forcing you to buy gold. And personally, I avoid gold hucksters like the plague. Gold is officially not part of the monetary system, so whether it goes up or down has no real bearing on the economy at large. Buying gold is not going to crash the economy. If that were true, the economy would have crashed a long time ago. Its price reflects in large part what a certain type of investor feels about the current state or even future of the economy, particularly the world economy.

[eridani]

26. It would be the same art regardless of what the raw material was

Bubbles indicate that what investors "feel" us usually irrational. (Not that numismatics isn't interesting--it just doesn't reflect the real economy.)

[Art_from_Ark]

28. Oh, for crying out loud again

Numismatics is more than just coin collecting-- it is the study of money and how money has evolved. Numismatics is directly tied with economics and the real world.

Here's an organization that can help you learn about money. It's called the American Numismatic Association. Educate yourself.

http://www.money.org/AM/Template.cfm?Section=Home

[eridani]

30. Just about all of my money is blips on a hard drive or other storage device somewhere

So is yours, I wager. Numismatics is a nice hobby, but not much else.

[Art_from_Ark]

32. You are truly clueless

Making the claim that "Numismatics is a nice hobby, but not much else", without knowing a goddam thing about numismatics, borders on the point of absurdity.

[eridani]

33. We use electrons for money these days. Get with the times. n/t

[Art_from_Ark]

34. Are you for real?

To tell you the truth, I think you are just pulling my chain-- and doing a pretty good job, I might add.

But the simple truth is, the value of money depends on its scarcity. When you have money reduced to the level of tokens, which can at least be counted, and blips, which have no accounting, no intrinsic value. and can be fabricated at any time, then the value of "money" becomes diluted. Uncle Sam is now constantly fabricating blips and zipping them off to banks, which turn around and "invest" the blips in Uncle Sam's Treasuries for a nice profit. You may be content to have essentially worthless tokens and "blips" as money, but people in much or the rest of the world are getting tired of this system of monetary unaccountability, and prefer to have something tangible, whose scarcity is known, as part of their assets. This "get with the times" mentality is like the head lemming asking all the other lemmings to follow him. Sorry, but when it comes to monetary assets, I prefer the tangible over the intangible.

[eridani]

36. Establishing accountability has nothing to do with what money is made of--

--and everything to do with the will to regulate. The value of money depends on how much human and natural capital the issuing society has.

[Art_from_Ark]

37. Here we go, back to "human and natural capital"

Malta and Cyprus both had relatively little "human and natural capital", but their currencies were relatively strong before they joined the euro.
Russia has a lot of "human and natural capital", but the ruble is worth a mere fraction of what it was back in the USSR days ($1.29 fixed price then versus about 3 cents today)

Really, "human and natural capital" is only a small part of the currency evaluation equation. The issuance of large sums of new, unbacked currency is generally looked upon unfavorably by outsiders. Even the euro is getting smacked, in large part after announcing $1 trillion worth of new euros would be fabricated to handle the Greece situation. If a currency is diluted, the value usually goes down. Why would someone spend "good" money on a foreign currency if the issuing country could just print up (or "blip up") huge additional sums any time it wanted to?

[eridani]

39. Malta and Cyprus are irrelevant, unless you live there

Fuck outsiders. Communities should take care of themselves.

[Art_from_Ark]

40. Communities should take care of themselves

I won't disagree with that.

But since the days of the Phoenicians, at least, communities and nations around world have decided that they need goods and materials that are not available where they are. I will not dispute that indigenous peoples around the world have suffered because of this constant desire to seek out materials and resources. I'm only saying that that is how it is today. Communities and nations really can't put a fence up around themselves in this modern world, although North Korea is trying really hard to do that. Everyone else, for the most part, is dependent on someone else in some other part of the world, some more than others. One of the underlying concepts of dependency theory.

[girl gone mad]

15. hmm..

"What backs a society's currency is the sum total of its human and natural capital."

Actually, I think what currently backs our currency is the fact that our government accepts it to cover tax liabilities. Eliminating taxes would debase the dollar's value.

[Art_from_Ark]

22. The dollar is a special case

in that it is the world's reserve currency. Thus, it has been relatively immune to the debasing that has occurred with lesser currencies. But if the world decides that the dollar has run its course as a reserve currency, then the dollar will quickly become debased, much like the British pound did after World War I. The collection of taxes has little to do with it, I think, since all countries collect taxes in their respective fiat currencies.

[girl gone mad]

24. The dollar has run its course as a reserve currency.

Now we're in beggar thy neighbor territory with most of the world competing to devalue.

The dollar isn't special among fiat currencies. Under every fiat system, money is only created by government deficit spending, beecause fat money is not tied to or backed by any commodity. The demand to hold and acquire money is driven by taxes levied by the state, which can only be paid off in the state issued fiat currency.

[Art_from_Ark]

25. Once again, every country collects taxes in its own currency

I just got through paying Japanese taxes in Japanese yen. There is nothing special about that.

The dollar is still the world's reserve currency.

As a result, the dollar still occupies a special place among fiat currencies.

To paraphrase Mark Twain, news of the death of the dollar is greatly exaggerated.

[Po_d Mainiac]

7. So fill your cupboards, pantry, and freezer with groceries.

Fill a few fuel barrels and convert all your open spaces into gardens. If you have the room, grow some food on the hoof. Know how to fill a cooler with fish from the pond down the road

Pay off all your debt, and have a healthy savings account....

When this is accomplished, acquire PM's.

[dmallind]

18. I stopped reading at the insanity of "ultimate store of value, which is gold" crap

Why some people think a reasonably good conductor that does not tarnish is the ultimate indicator of real wealth is beyond my imagination.

All any such analysis shows is that gold and the equities markets have increased at a similar rate.

[Art_from_Ark]

23. Depends on your time frame

Since 1968, gold has increased at a rate 3X higher than equities
Since 2001, gold has increased 4X in price, while equities have been stagnant or even declined.

Gold has been an indicator of wealth for thousands of years. Equities have existed for only a few hundred years, and as anyone who has been paying attention can say, equities in recent years have been characterized by mismanagement, lying, corruption, you name it. Some companies are good, but even the big ones can fall. And now companies have adopted a strategy of "growing" by cutting corners, firing employees, and outsourcing operations to low-wage countries. They can't keep that up forever.

[dmallind]

29. The time frame fo the study referred to

Which tried to show no increase in equities compared to gold. By definition that means they grew equally in that time period.

So essentially the idea of gold being the true measure of value is that we have liked it for a longer time than we have liked dollars or shares?

[Art_from_Ark]

31. Once again, it depends on the time frame

The person doing the study has merely picked a time frame that agrees with the point he wants to make. But I showed that during time frames that I picked, gold has kicked the stuffing out of equities.

Equities have sucked since 2000. Lots of big companies have fallen out of the Dow during that time, lots of other companies have crashed into penny stock land, other companies have been nothing but scams since the beginning. The little investor has gotten burned while the big investors, with inside knowledge, usually get out unscathed. And now we have Big Phuckup dragging all sorts of mutual funds and 401(k)'s down with it. And the "growth" model of Big Business these days is to squeeze everything everything they can out of their lower tier employees whose jobs they can't ship overseas, while giving their top people obscene bonuses. Or gobble up smaller companies, such the blood out of them, and discard the husk. Really, this system cannot go on forever.

[fasttense]

27. See many, many 100's of thousands of years ago the aliens

made us into slaves to mine for gold. If the aliens didn't want to take our gold away (because it's a good conductor that does not tarnish), it would have no value at all.:crazy:

[Odin2005]

35. The only true wealth is resources and capital goods. Gold Fetishism is Libertarian BS.

Gold is just like currency, it (except when used in jewelery and high-quality electronics) is merely a store of wealth that has value because society says it does. So Libertarian Gold Standard idiots are deluding themselves.

You can't eat gold.

[Art_from_Ark]

38. "You can't eat gold" is a very stale argument

Do you live in a gingerbread house? Is a chair no good because you can't eat it? How about paintings, photographs, knick-knacks? You can't eat any of them. You can't eat paper money, either. Or credit cards. Or any monetary instrument, for that matter.

There are plenty of people investing in gold who aren't "Libertarian Gold Standard idiots". People who buy gold here in Japan don't give a rat's ass about Libertarian dogma. Neither, I'm sure, do the governments of China, Sri Lanka, or Mauritius, to name a few. Or the nouveau riche in India. Or average citizens in Argentina, Chile, Colombia, Serbia, Hungary, and elsewhere, who have seen, at one time or another, the ravages of hyperinflation destroy their life savings, and would rather hold something tangible and universally valuable as a monetary medium than risk being subjected to another bout of wealth-destroying inflation.

[Odin2005]

41. There is no risk of hyperinflation in the US right now.

The problem is DEFLATION, not inflation. In fact very mild inflation (1% or 2% a year) is actually good for the economy because it encourages investment of wealth instead of hoarding of currency.

[Art_from_Ark]

42. There might be no risk of hyperinflation in the US right now

but I don't buy the argument about deflation.

College costs-- going up.
Insurance-- going up.
Health care-- going up
Utilities-- going up.
Grocery prices-- going up.

And sooner or later, with all of the trillions of new digital dollars that have been created out of thin air in the last two or three years, there will be the piper to pay at some point down the line.

[Odin2005]

43. Some things go up, some things go down, but the total is down.

College, Insurance, Health Care, and Utilities are simply price-gouging. Food follows it's own idiosyncratic cost pattern based on world population relative to total food production. Food prices only deflate massively if there is a big increase of the productivity of agriculture, such as the introduction of the potato or the Green Revolution.

Helicopter Ben's printing presses have been going exactly because of deflation, which was the context of his now "infamous" remark. He spent much of his academic career studying the causes of the Depression and one of the reasons he studied is that the Fed didn;t do anything to prevent deflation.

[Statistical]

44. Exactly as bad as inflation is the solution to inflation is much "easier" than deflation.

that isn't to say the solution for runaway inflation isn't painful. Balance budgets, cut national debt, massive raise borrowing cost.
However there is a proven record of controlling inflation as long as the govt is serious about controlling it.

Deflation is far more insidious. It destroys from within. It cuts of any reason for business to expand. Without expansion deflation continues and you end up with this massive catch-22.

2-3% inflation is "perfect" however I would rather have 10% inflation than 5% deflation.

[Art_from_Ark]

46. I have lived in inflationary times (the '70s, etc.)

and deflationary times (Japan), and it has been much easier to cope with deflation than inflation. People who are living on fixed incomes, and people whose incomes do not rise with inflation, can get burned really bad in inflationary times.

[Statistical]

47. I didn't say inflation was less painful it is easier to correct.

Push interest rates high enough, stall growth and you will break back of inflation.

Runaway deflation is an economy killer. Just ask Japan going on two lost decades. Once you get into a deflationary spiral there aren't a whole lot of good solutions to restore economic growth.

[Art_from_Ark]

48. I am in Japan

And the situation here is not quite as desperate as it is made out to be, "Lost decade" notwithstanding.

Japan's situation is one that does not make for easy comparisons. First of all, the population is aging, the birth rate is declining. But the population of these narrow islands, which together occupy about the same land area as California, is already 126 million, or about 4 times the population of California. So it's not like this country is underpopulated.

Secondly, Japan has had to deal with exchange rate pressures that few other countries have had to deal with. For example, the yen was at 360 to the dollar in 1971; today, it is at 90 yen per dollar. Put in other terms, the yen is 4 times higher vis-a-vis the dollar now, than it was 40 years ago. And in 1985, the yen skyrocketed from 260 to the dollar, to 160 to the dollar, as a result of the Plaza Accord. How many export-driven economies would have been able to cope with that?

Third, how do you grow an economy that is already saturated with consumer goods, and whose exports are hampered by an overly strong currency?

[Statistical]

49. Yeah that is called DEFLATION.

The rising / strong Yen is a single of a deflationary environment.That is the whole point. The length of time it has taken for Japan to muddle through this is evidence of the horrible crippling dangers of deflation.

Had Japan faced inflation it would have been solved sometime ago.

There are rapid and effective (if painful) fiscal solutions for inflation, not so much for deflation.

[Art_from_Ark]

50. I strongly disagree with your contention that

"the rising / strong Yen is a (signal) of a deflationary environment".

How do you explain the Plaza Accord, which artificially raised the yen exchange rate at a time when the country was entering its "bubble economy"?

During the "lost decade", the yen went through some wild gyrations, going from an all-time high of 78/dollar in 1994, to a low of 143/dollar in 1998. That is, the yen lost 40% of its value vs. the dollar during a period of supposed deflation.

Japan also had a period of severe inflation which lasted for more than 10 years.

[Art_from_Ark]

45. I still don't buy "the total is down" argument

The "deflation" is primarily the result of depressed interest rates and cheap imported crap. Prices may be getting lower for some durable goods, but the quality is also getting worse.
ANd whether College, Insurance, Health Care, and Utilities are simply price-gouging is a moot point-- the end result is that they are still going up. As are local taxes.