Proof That Gold Is Not a Bubble

If a picture says a thousand words, then the image below speaks volumes against accusations of a bloated asset bubble in gold.

I'm sure you've seen the invariably confident claims that gold must represent a bubble, backed by deeply unscientific litmus tests. It must be a bubble, because "my mother recently asked me if she should buy some." (Psst! Hey, Mom ... Yes!) Others may feel compelled to sound the panic alarm because -- gasp! -- commercials have appeared on television to sell the yellow metal.

Of course, those anecdotal arguments against gold exposure have proven incorrect time and time again. With each successive breakout to fresh all-time highs, gold continues to confound perennial bubble callers with the sheer strength and continuity of its secular bull-market run.

Concealed amid the cavernous disconnect between the equally entrenched outlooks of gold bulls and bears, however, lies a basic and crucial consideration that bubble callers have persistently overlooked. It's all too easy to presume that a bubble exists when an asset gains value and attention quite rapidly. But one careful look at the relative historical context offers enormously compelling evidence that gold's historic resurgence retains ample room to run. At the core of gold's momentum is not a fear-driven speculative frenzy, as many have argued, but rather a protracted revaluation event for a global currency that had been all but tossed into the world's collective wastebasket.

I know we are all busy Fools, but I need you to take a moment to fully absorb the implications of the following chart:

Hedge fund manager Eric Sprott presented this data to the Casey Research Gold & Resource Summit last fall, and it remains the most powerful visual tool I have encountered to help dissuade Fools from rushing to careless presumptions of gold's bubblehood.

As you can see, a very significant portion of the world's wealth was routinely held in gold throughout the twentieth century; that is, until the currency encountered wholesale cultural abandonment in favor of the almighty dollar and its worldwide fiat counterparts, and the global economy embraced obscene degrees of fiat-based leverage that we now know set the stage for our ongoing financial crisis.

Gold ownership through the ages
Although many continue to misperceive gold as a commodity to trade fluidly in response to panic or fear, many fail to recognize just how significantly that notion differs from historical attitudes toward gold. Prior to 1933, gold was effectively indistinguishable from U.S. currency, and the dollar's official peg at $20.67 per ounce of gold meant that gold coins and paper bills that were promises for gold could circulate in tandem.

Then along came a historic bait-and-switch that Bernie Madoff himself would tip a hat to: In 1933, President Roosevelt ordered the confiscation of all gold from the public, outlawed the possession thereof, and then devalued the U.S. dollar by nearly 70% overnight, with a revaluation of gold to $35 per ounce. By the time American citizens would once again be permitted legally to own and trade gold in 1975, the gold price had appreciated a further fivefold to some $175 per ounce. President Nixon, of course, had finally severed all ties between gold and the dollar in 1971, which itself set the stage for that decade's inflationary battle and subsequent spike in gold to $850 per ounce in 1980.

After then-Fed Chairman Paul Volcker courageously hiked the federal funds rate to 20% in 1980 to slay an inflationary beast, the gold market snapped back, fell out of favor with most investors, and quickly became the all-but forgotten currency of the late twentieth century. Asset allocation models, which had typically advocated for 5% to 10% gold exposure after 1975, were gradually adjusted to remove gold from the picture entirely. Unbacked fiat currency, and in particular the U.S. dollar, grasped the financial reigns as though gold were now some wholly irrelevant vestige of a quaintly fiscally constrained past. As private investment demand tanked, and sales from central banks boosted supply, gold struck rock bottom as the century came to a close.

Enter the true asset bubbles
To be clear, the above chart does not speak directly to those trends within gold investment allocations, nor reveal the shifting boundaries between public and private ownership of gold. The preceding discussion, rather, provides context for the historically anomalous abandonment of gold that happened to coincide with an equally anomalous and highly leveraged explosion in the combined notional value of competing asset classes worldwide.

Every last Fool who has ventured to ascertain the root causes of our ongoing financial crisis will no doubt recognize the factors that precipitated the massive decline in gold's value as a proportion of global assets between 1981 and 2009. Following incremental moves to undermine the reach of Glass-Steagall -- as in 1987, when the Fed bowed to pressure from the predecessors of Citigroup (NYSE: C  ) and JPMorgan Chase (NYSE: JPM  ) to permit banks to deal in commercial paper and mortgage-backed securities -- the eventual repeal of Glass-Steagall fomented arguably the largest asset bubble ever formed. I'm talking about the toxic mountain of global financial distress that Warren Buffett labeled "financial weapons of mass destruction": derivatives. And thanks to Helicopter Ben and his seemingly limitless appetite for monetary intervention, this asset bubble has yet to truly unwind!

During 2009, gold reached the $1,000 mark for the second time in as many years. Fortune Magazine boldly proclaimed gold a bubble at the time, drawing a sharp rebuke from this very Fool. The SPDR Gold Trust (NYSE: GLD  ) , which I do not recommend as a suitable proxy for gold, has climbed another 34% since that time. A secular bull market, of the strength and longevity we have witnessed from gold thus far, underscores the fundamental return of this globally recognized currency into the fabric of our global financial system, Alan Greenspan himself has marveled: "What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment."

If gold is not fundamentally irrelevant, as the world's financial markets saw fit to pretend for many years, but rather the foremost barometer of distress in unbacked currencies (Greenspan has called gold "the canary in the coal mine"), then a Fool can reasonably expect gold to retake some meaningful portion of its value relative to global assets before any secular bull market reverses course. I have no way to know whether gold will ever make up as big a proportion of global assets as it did historically, but I am extremely confident that its proportion beneath 1% as of 2009 was only the beginning.

Something has to give with respect to the chart above. Wholesale accumulation of gold by central banks and investors the world over will likely continue to support gold's multiyear revaluation event relative to the U.S. dollar. Meanwhile, global asset values, tainted by toxic derivatives and other leveraged assets, remain highly susceptible to a significant downward correction. Along with those derivatives, I consider U.S. Treasuries another potential bubble of fairly epic proportions; bond fund manager PIMCO's remarkable decision to remove all Treasury bond exposure only seems to confirm my suspicions there.

If any of this strikes a chord of truth for you as an investor, consider some form of investment exposure to gold (or silver). Central Fund of Canada (AMEX: CEF  ) provides reliably sound exposure to unencumbered gold and silver bullion, while the Market Vectors Junior Gold Mining ETF (NYSE: GDXJ  ) offers some very simple one-stop exposure to promising gold and silver miners, including my top gold pick for 2011: Gammon Gold (NYSE: GRS  ) . Those seeking larger-cap plays, meanwhile, should remember that Goldcorp (NYSE: GG  ) is the hands-down king of the major low-cost producers.

I believe that gold will keep rising well beyond my conservative long-term price target of $2,000. As I stated last year: "Gold's legitimacy was never lost; it was merely forgotten, ignored, and then grossly misunderstood." Restoring what is truly the ultimate currency from the brink of supposed irrelevance to its rightful place within the sum of global asset values requires a monster move, and 0.8% of the total by 2009 does not even begin to convey a bubble.

Give me a shout when gold reaches even 5% of global assets. Perhaps then, it'll be time to evaluate whether gold's really a bubble. For now, however, I view some manner of gold (or silver) exposure as a basic financial imperative. Whatever your view on this inescapably controversial topic, I look forward to reading your thoughts in the comments section below.

Fool contributor Christopher Barker is the self-appointed sultan of silver, and the gentle giant of gold. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Central Fund of Canada, Gammon Gold, and Goldcorp. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a gilded disclosure policy.


Read/Post Comments (81) | Recommend This Article (75)

Comments from our Foolish Readers

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  • Report this Comment On March 22, 2011, at 5:47 PM, jayw999 wrote:

    Chris. great food for thought! It will be quite interesting to see what the gold % of global assets is as of the end of 2010, whenever that data is available.

  • Report this Comment On March 22, 2011, at 7:15 PM, PeterRabit wrote:

    Great article, Chris. I posted a link on the Macro Economics board.

    Peter

  • Report this Comment On March 22, 2011, at 7:35 PM, golddlog wrote:

    Like Artie Johnson used to say on the television show laugh-in "Interesting, very interesting". It seems like from the 5-fold 40 year increase in gold price from 1933 to 1975 could be applied to future time frames as a conservative estimate of current "fair value" of gold. If we extrapolate $800 gold near 1980 then it's quite possible to see gold at $4,000 per ounce by 2020. I realize that is cherry picking a high point in time for gold but the exponential government debt service accumulated in recent years and unprecidented money printing by the fed probably offsets this optimistic time reference. I agree with you Chris a long, slow, steady rise in gold price is not an indication of a bubble and it bodes well for a new baseline for gold above $1,000/oz. and investors in precious metals and mining companies. I can wait for the payoff down the road, can you?

  • Report this Comment On March 22, 2011, at 9:42 PM, rofgile wrote:

    TMFsinchiruna,

    Could you post comparison graphs showing what assets in a bubble looked like at their peak? Without that, this data is probably misleading. The total amount of assets in the world has continuously increased, with so many more markets, stocks, properties, etc in the world. Especially in the last two decades (with the rise of China and India) and the great growth of stocks from the 1980's - to 2000s.

    You should show things that WERE bubbles as percentage of total world assets. My guess is that even "tech stocks (2000 bubble)", "US housing (2007 bubble)", hong kong property prices "current bubble" would all look quite similar to your gold graph because the total world assets now likely dwarf any subcategory of assets.

    -Rof

  • Report this Comment On March 22, 2011, at 9:54 PM, t0bes wrote:

    An amazing graphic after gold has had such a good run. Certainly gives me confidence to keep adding to my holdings - following your recommendations of course, Chris :-)

    Thanks for the great insights

  • Report this Comment On March 22, 2011, at 10:07 PM, XMFSinchiruna wrote:

    rofgile,

    I fear you have missed the point entirely. Gold is money.

    I know that global assets surged in scale by leaps and bounds over the last 20 years of the 20th century ... that is a central thrust of the article that lies directly above your comment.

    Something tells me that tech stocks never quite accounted for 20-30% of global assets, but if you have the time and inclination, go ahead and chase down the data.

  • Report this Comment On March 22, 2011, at 10:14 PM, TMFKopp wrote:

    Chris,

    Interesting chart. A couple thoughts...

    1) Similar q to above, there's nothing accompanying the chart -- footnote or in the article -- that really lets us know what exactly we're looking at. Obviously given the title of the chart there's something that we're supposed to assume, but when I see a chart that drastic, I can't help but wonder. So what exactly are the data underlying that chart?

    2) If we do believe the implication of the chart at face, the assumption would be that gold could be massively undervalued versus historical levels. According to data that I have, the ratio of gold price to crude oil price in 1981 was 12.9. Currently, it's roughly 13.6. If we're talking about gold as a "globally recognized currency", what's the basis for gold buying more oil today than in '81?

    3) On a number of occasions you've mentioned your "conservative long-term price target of $2,000." I haven't been able to find an article or blog post from you that breaks down how you get to that target. Can you point me in the right direction?

    Matt

  • Report this Comment On March 22, 2011, at 10:28 PM, TMFDiogenes wrote:

    Chris, just curious, is the argument that "gold and gold mining shares as a % of total assets" is going to rise to come closer to its pre-fiat levels? If so, what's the rationale, unless we're assuming a return to gold-backed currency?

  • Report this Comment On March 22, 2011, at 10:30 PM, ETFsRule wrote:

    I have to agree with Rof. This is an interesting graph, but it is very misleading.

    You could graph pretty much anything "as a % of global assets" and make it look like it is underpriced: palladium, cotton, pork bellies, iron ore, US dollars, etc.

  • Report this Comment On March 22, 2011, at 10:49 PM, catoismymotor wrote:

    + 1 Rec

    Here is another Troy ounce of evidence that gold is money.

    http://edition.cnn.com/2011/BUSINESS/03/22/gaddafi.gold.ft/i...

  • Report this Comment On March 22, 2011, at 10:58 PM, ETFsRule wrote:

    To expand on my previous post I'll do some "fast and loose" analysis. I don't have access to the data sets, but this will suffice.

    Let's use the M0 to represent "US dollars", and the M3 to represent "total US assets". Now please see this graph:

    http://www.paulvaneeden.com/Sites/paulvaneedencom/Root/Web/I...

    We can see that the lines were very close together in 1959, so for the sake of argument I'll say that the M0 was roughly equal to 50% of the M3 in 1959 (probably a conservative estimate).

    By 2008 the M3 was over 13,000 while the M0 was around 1500.

    So, I could make the very dramatic claim that US dollars have fallen as a % of total US assets, from 50% to roughly 0.09%.

    What does that tell us about the presence of bubbles? Absolutely nothing.

  • Report this Comment On March 22, 2011, at 11:40 PM, ETFsRule wrote:

    I don't know how I came up with 0.09% there, it should be more like 11.5% for the 2008 number. But the point still stands.

    And the difference would be much more dramatic if I had the ability to make a plot of US dollars versus "global assets", instead of just the M3 money supply.

    The point remains: Sinch's graph is meaningless.

    G'nite all.

  • Report this Comment On March 22, 2011, at 11:56 PM, TMFAleph1 wrote:

    Chris,

    I'm not sure there is any obvious conclusion to be drawn from that graph. In addition, I'd be very curious to know how the author of the graph defines 'global assets' -- I think it's extraordinarily unlikely that gold and gold mining shares represented over a quarter of all global assets in 1981.

    Alex D

  • Report this Comment On March 23, 2011, at 1:30 AM, PeterRabit wrote:

    Chris, the charge has been made that the "global assets" amount includes the notional value of derivatives. Do you have any idea how the denominator was arrived at?

    Here is a link to the original document from the Erste group in June 2010.

    http://www.zerohedge.com/sites/default/files/2010-06-21%20IE...

    Peter

  • Report this Comment On March 23, 2011, at 1:42 AM, PeterRabit wrote:

    TMFKopp said:

    2) If we do believe the implication of the chart at face, the assumption would be that gold could be massively undervalued versus historical levels. According to data that I have, the ratio of gold price to crude oil price in 1981 was 12.9. Currently, it's roughly 13.6. If we're talking about gold as a "globally recognized currency", what's the basis for gold buying more oil today than in '81?

    That is an excellent question.

    Here is some food for thought. Perhaps gold is not undervalued but some large parts of 'global assets' are WAY overvalued. Oil is real and certainly has real value, so perhaps gold and oil are still similarly valued. But other stuff (land, buildings, stocks, T-bills, etc.) are overvalued.

    Peter

  • Report this Comment On March 23, 2011, at 8:21 AM, XMFSinchiruna wrote:

    PeterRabbit,

    Indeed, I encourage all readers to review in full the report by Erste Group at your above link. It does a fine job of laying out additional evidence in support of this bull market remaining miles removed from bubble territory.

    The precise methodology is not disclosed therein, but I do indeed suspect that notional value of derivates is included in the denominator ... and rightly so. It is precisely the violent contraction in some portion of those 100s of trillions of dollars in derivatives that keeps a Fed chairman up at night devising the next round of quantitative easing that can hold these mounds of paper and the economies suffering under their weight together a little longer. When those efforts eventually backfire, which many great minds like Marc Faber see as inevitable, I submit you'll see the numerator rising to meet a falling denominator.

    There was no intention above to suggest that gold and gold equities will return to their prior proportion of global assets, but rather that 0.8% in 2009 can not reasonably be considered indicative of a bubble in gold ... and certainly not by means of any comparison to the cycle that culminated in 1980.

  • Report this Comment On March 23, 2011, at 8:34 AM, XMFSinchiruna wrote:

    TMFDiogenes,

    Thanks for the question. I make no argument that gold and gold mining shares will return to their 20th century mean as a proportion of global assets. I suppose there might be a scenario or two where it could be conceivable, but perish the thought .. those are unimaginably unattractive economic scenarios.

  • Report this Comment On March 23, 2011, at 8:56 AM, XMFSinchiruna wrote:

    TMFMarathonMan,

    I'm curious to know why your instincts instruct you to doubt the datum from 1981. The datum makes perfect sense to me. The U.S. had just severed the final gold-dollar link in 1971, and in the ensuing decade the USD declined from about 1/40th an ounce of gold to average about 1/500th an ounce of gold in 1981. So the gold price had just multiplied 12.5 times in price over the prior decade ... a mostly stagflationary decade that preceded the very sudden and almost unimaginably massive expansion of global asset values ... led by the structural revolution by financial institutions and the derivative monster constructed therewith.

    In any event, Erste Group has been around since 1819, and transparency is stated as a core corporate value. I am sure they would be happy to address any challenge you would like to make to the veracity of the 1981 datum.

  • Report this Comment On March 23, 2011, at 9:35 AM, XMFSinchiruna wrote:

    TMFKopp,

    1. Same as above, I encourage you to address questions regarding the data or methodology to Erste Group. As I indicated above, I suspect the derivatives bubble generates a major portion of the "drastic" impact on the chart that may be giving you pause.

    2. Good point. It appears that when global asset values launched for the moon on that derivative-fueled rocket, hard assets were effectively excluded from the party. If the party is over for leveraged paper assets, then perhaps hard assets like gold and oil then become the reasonable flights to safety.

    3. There is no single mathematic formula behind my $2,000 price target. It is my own conservative reflection of a confluence of informing inputs, including a comprehensive understanding of supply/demand dynamics, informed extrapolation of ongoing trends in currency devaluation and sovereign debt accumulation, the independent price targets offered by a range of proven experts in the field, a comprehensive understanding of paper leverage in the gold market and the likely impact thereof in a maturing bull market, analysis of the silver market pared with the two-way relationship between gold and silver, a qualitative survey of financial and geopolitical risk, etc., etc., etc. Every gold investor is furthermore encouraged to devise their own independent target price for gold, and to limit their allocation according to their own personal degree of confidence in that price target.

  • Report this Comment On March 23, 2011, at 11:48 AM, rofgile wrote:

    I think several responders who critically look at that chart now agree that it is suspicious at best, and likely totally incorrect at worst.

    I think it is always good to know how data was generated and organized before you publish your results with your name attached to the article. You should not refer back to the original propagators of bad data and dismiss your own responsibility - as the author of the article it is up to you to make sure that it lives up to your reputation.

    I also strongly agree that it is unlikely that gold and gold mining companies were 26% of the world's total assets in 1981. Maybe gold could be 26% of the world's *mining* assets back in 1981 - but the original article of the Erste Group claims of all world assets. That's nuts. Just do some mental math about how many different kinds of assets there are in the world back in 1981 - hint: think of the value of land alone (which will far, far exceed total value of any commodity).

    Sorry for the hard critiques but this is really bad data.

    -Rof

  • Report this Comment On March 23, 2011, at 12:17 PM, mrpjo1 wrote:

    I agree with the comment regarding the denominator used in the calculation. Seems a bit suspect. I'd also think that denominator has grown substantially since 1980 vs. now.

    The gold bug has not bitten me but I respect it. I would say to fellow fools to be cautious. I think there's a lot of confirmation bias out there on gold, or "reflexivity" as George Soros likes to describe it in markets. In short, the gold market is a self fulfilling prophecy right now. It goes up because everyone thinks it will and acts accordingly. Again, be cautious. I really take no stance on gold as a bubble. However, it does freak me out that many are talking about it and that the gold stalwarts, like Chris, more and more defend that it's not. I can remember similar arguments from dot com guys and housing bulls.

    Remain bullish, fine with me. Do yourself a favor though, buy some puts!

  • Report this Comment On March 23, 2011, at 12:22 PM, TMFAleph1 wrote:

    Chris,

    I suppose it all comes down to the way in which one defines 'global assets'. I had calculated that at the end of 2008, the value of all mined gold alone (i.e. I wasn't including gold mining shares) represented 2.6% of global financial assets.

    It simply struck me that the notion that an asset class like gold and gold mining shares would represent over one-fourth of all global assets in 1981 -- when financial markets were already pretty well developed -- strains credulity. I imagine it would require a very restrictive definition of 'global assets'.

    On the other hand, by comparison with my figure, the Erste Group's 0.8% for 2009 appears to require a very expansive definition of 'global assets'.

    Alex D

  • Report this Comment On March 23, 2011, at 1:47 PM, TMFKopp wrote:

    Chris,

    Thanks for your feedback.

    "Same as above, I encourage you to address questions regarding the data or methodology to Erste Group. As I indicated above, I suspect the derivatives bubble generates a major portion of the "drastic" impact on the chart that may be giving you pause."

    As noted in other comments, if you're going to hold this chart up as proof that gold isn't a bubble, I think the onus is on you to fully understand the chart and the data behind it.

    Matt

  • Report this Comment On March 23, 2011, at 2:36 PM, TMFBent wrote:

    That graph proves one thing beyond a doubt: people believe what they want to believe. OK, two things. The lousy graphic prove the hedge fund guy hasn't upgraded his Excel in years. It proves nothing about the bubble status of gold.

  • Report this Comment On March 23, 2011, at 2:58 PM, TMFKopp wrote:

    @TMFBent

    "The lousy graphic prove the hedge fund guy hasn't upgraded his Excel in years."

    Perhaps the cretins at Microsoft wouldn't accept gold as form of payment for a new version of Office? :)

  • Report this Comment On March 23, 2011, at 3:36 PM, XMFSinchiruna wrote:

    rofgile,

    That is your completely unsubstantiated opinion that the data is "bad", "suspicious", and/or "incorrect".

    To rofgile, TMFKopp, and others above:

    As noted above, Erste Group is a professional financial firm with nearly 200 years in operation. Eric Sprott saw fit to incorporate the data into a a presentation he gave last year. We can request further information regarding the parameters of their calculations and their methodologies employed, but I think that a published report from a respected research group deserves some modicum of suspended disbelief. Anyone is welcome to conduct their own research into the matter and post their rebuttals accordingly (with clearly stated methodologies and verifiable sources provided to allow for independent confirmation as is presently being asked of me), but I find these dismissals of the data on the basis that "it doesn't seem right" unconvincing.

    I will be happy, meanwhile, to attempt to contact the firm in search of answers with respect to the precise methodology employed. As I inferred in the article, I expect to find that notional value of derivatives was properly employed in the calculations, and that this would account for the degree to which some are surprised by the dramatic shift between 1981 and 2009. I will post any findings here.

    mrpjo1,

    "I'd also think that denominator has grown substantially since 1980 vs. now." Yes, it has grown by leaps and bounds ... that is the point! Also, it is completely incorrect to suggest that gold is going up "because people think it will". With due respect, that is nonsense that completely ignores the fundamental basis for the bull market.

  • Report this Comment On March 23, 2011, at 4:37 PM, TMFAleph1 wrote:

    In support of Chris, my opinion that gold and gold miners are unlikely to have represented more than a quarter of global assets in 1981 isn't based on any hard quantitative benchmarks, merely on the intuition that the figure doesn't "look" right. However, there are all sorts of data that are simultaneously correct and counter-intuitive/ surprising.

    In fact, if we compare it to my estimate for the end of 2008 (2.6% for the value of all mined gold), it begins to look more plausible.

    Alex Dumortier

  • Report this Comment On March 23, 2011, at 5:31 PM, wasmick wrote:

    "As noted in other comments, if you're going to hold this chart up as proof that gold isn't a bubble, I think the onus is on you to fully understand the chart and the data behind it."

    +100

    I wish I worked at a place where I could throw out an unsubstantiated claim and then when challenged simply say, "prove me wrong".

    I would but I'm still busy trying to disprove the existence of God.

  • Report this Comment On March 23, 2011, at 6:14 PM, XMFSinchiruna wrote:

    wasmick,

    I fully understand the chart, though I was not privy to the calculations behind it. By your logic, and that of the commenters above, no one may print a chart derived from data in a published report from a professional research group without first essentially repeating the research behind the report.

    I've spent the past several years explaining why gold is not a bubble. The above chart is merely one more visual aid. As you point out, though, proving a negative is inherently problematic.

    As such, and especially given the incredibly poor track record of gold's errant bubble callers over the past decade, the principle onus rests clearly on the back of gold's detractors to prove the existence of a gold bubble using evidence that actually takes forthcoming macroeconomic and monetary scenarios into proper account in a genuinely way; while avoiding: uselessly anecdotal quips like those parodied above, easily refuted tomes about how gold lacks utility or is not money (both false), etc.

    I am wide open to all respectful and well reasoned dialogue on the topic.

  • Report this Comment On March 23, 2011, at 6:54 PM, BillyTG wrote:

    Understanding gold, to me, seems similar to Buffet's description of buying dollars for fifty cents: Some people get it and some don't. Those who don't are unlikely to ever get it. Those who get it don't need to be convinced further.

    Some of the dominant themes I notice of those who "don't get it":

    -They often reference "goldbugs" and talk of TV ads and gold being in a bubble because everyone is "talking about it." Those who "get it" realize that gold is the currency of kings and countries. My small silver and gold orders don't budge the market at all. Iran's gold orders DO!!

    -Those who "don't get it" often talk of it being a hedge against inflation. Well, inflation is only part of the story. The bigger part is what Martin Armstrong says, that gold is a HEDGE AGAINST POLITICAL INSTABILITY AND SOVEREIGN DEFAULT. Guess how the current global political and economic climate are doing. When Tunisia's leader abandons his country with a plane-full of gold, when Qaddafi pays off mercenaries with gold, when the Saudis are converting their dollars to gold, when China and Thailand and Russia and Sri Lanka and practically every emerging economy is buying gold, that means that they see the writing on the wall: the euro and dollar are not safe!

    -Those who "don't get it" often talk of intrinsic worth. "You can't eat gold," they say. "Gold is not useful for anything," they say. I've struggled with this question myself, and this is my answer: FOR THOUSANDS OF YEARS PEOPLE HAVE BEEN GREATLY ATTRACTED TO GOLD. People like gold! I wish I had some logical explanation but I don't. It's shiny and beautiful. I challenge you to find me a society that has rejected gold, that finds it repulsive, that would throw a gold bar in the garbage.

    -Those who "don't get it" often try to use traditional financial models to value it. They analyze it the same way they analyze Kraft or Wal-Mart or Coke. Their brains, to me, seem incapable of comprehending the global nature of a political/economic hedge. GOLD IS NOT A STOCK! It's NOT A COMPANY!

    -Those who "don't get it" need numbers. "Why is $XXX your target?" I have no idea how high gold will go, not a freaking clue. What I know is that as long as there is momentum building for default, as long as the world keeps falling apart, gold will continue to be a very attractive alternative to a growing number of people and countries. All trends I see---from Portugal and the rest of the PIIGS, to a disgusting dollar printing, to a ridiculous Yen printing, to escalating major conflict in the Arab nations, to Israel's recent military activity, to China's internal troubles and long-term strategic underhanded ways---leads me to believe that the momentum is building. When a new World War starts to indicate a stable predictable outcome, or a new global currency evolves, gold will probably drop like a rock. We're not there yet.

    -Those who "don't get it" might get it, if the economy gets to a tipping point for them, where they realize their income is not getting bigger, but the prices for food and gas are, where they realize that the US economy is in serious jeopardy. When the Euro totally implodes, with the US on very shaky ground, that's when I predict a lot of people here will see the light, and get rid of dollars.

    -Those who "don't get it" say things like "Wal-mart doesn't accept gold," or "I can't withdraw gold from an ATM machine." Those who get it realize that a GOLD-BACKED CURRENCY means we don't have to walk around with gold coins in our pockets. Having a currency that is hardwired to something, whether gold, oil, or a basket of commodities (for example), is what we're talking about. Actually, the dollar is tied heavily to oil, the petrodollar, because most of the oil in the world is traded in dollars (though that is disappearing, too, and there is heavily compelling evidence that is why we took down Iraq, and will eventually take down Iran, two countries who refused to trade oil in dollars). Dollars and oil, however, are not hard tied. What I mean is that we don't equate a dollar with a certain amount of oil. Instead, we just print dollars by the billions (look up POMO to see how many tens of billions the Fed injects each week).

    -Those who "don't get it" are part of one of the greatest lies ever, and don't want to admit it. Warren Buffett is among your ranks, so at least you have noteworthy company. I've met a major hedge fund manager this past year who felt the same way, that gold is a joke, but good for a trade or two, and that the dollar will be the word's reserve currency forever. People who made their fortunes off the dollar ponzi scheme, I believe, are emotionally attached to the system, and unable to recognize the sham that it is.

    There are more that I can't think of right now. The bottom line is that some people get it and some don't. Gold is a momentum play, in my opinion, and the momentum is that the world's fiat currencies suck big time and ARE GETTING WORSE, making gold more attractive to more people. If looking at things globally is not your cup of tea, then stick with dividend stocks or microcaps or something, and good luck to us all. We'll need it.

  • Report this Comment On March 23, 2011, at 7:06 PM, TMFKopp wrote:

    @Chris

    "I will be happy, meanwhile, to attempt to contact the firm in search of answers with respect to the precise methodology employed. As I inferred in the article, I expect to find that notional value of derivatives was properly employed in the calculations, and that this would account for the degree to which some are surprised by the dramatic shift between 1981 and 2009. I will post any findings here."

    I look forward to hearing what you find out.

    If it is the notional value of derivatives contracts that causes the drastic shift, then what we're looking at is an absurd way of calculating global assets.

    Matt

  • Report this Comment On March 23, 2011, at 7:10 PM, TMFKopp wrote:

    @BillyTG

    "Gold is not useful for anything,"

    You are absolutely right, that is completely absurd. You can easily fashion gold into a sword and when political instability causes anarchy, use that sword to smite your enemies and take their food.

  • Report this Comment On March 23, 2011, at 7:20 PM, ETFsRule wrote:

    "As such, and especially given the incredibly poor track record of gold's errant bubble callers over the past decade, the principle onus rests clearly on the back of gold's detractors to prove the existence of a gold bubble using evidence that actually takes forthcoming macroeconomic and monetary scenarios..."

    Paul van Eeden and others have already stepped up to the plate and proven that gold is in a bubble, using their comparision of "the value of all mined gold" to the global money supply.

    It's intuitive, it makes sense, and it works. But you will continue to ignore this method because you don't like the results. Instead, you compare gold to "assets", even though you know as well as I do that this is a deeply flawed comparision.

    You constantly mention the fact that gold is money. And you're right, gold is money. Building on that idea, doesn't it make sense to compare gold to the money supply, rather than comparing it to options, derivatives and other meaningless financial instruments?

    Lastly, if you're going to make a specific price target of $2000, then the onus is on you to explain yourself for the benefit of your readers. Saying that you used a bunch of highly-advanced, top-secret techniques doesn't really tell them anything at all.

  • Report this Comment On March 23, 2011, at 7:47 PM, TMFHousel wrote:

    Who knows without further evidence, but I'm willing to bet the denominator uses the notional value of all derivatives, currently something around $200 trillion last time I checked.

    I've been accused of flaunting that figure myself, but I've learned and changed.

    About 90% of the notional value of derivatives is tied to interest rate swaps. Notional values can be misleading here, as they don't represent anything close to the actual exposure.

    Example: There's a $1 billion bond. You and I engage in an interest rate swap: I agree to pay you 5% fixed, you agree to pay me a floating rate, currently 6%. As it stands, I owe you $50 million per year, and you owe me $60 million per year. In practice, you would just pay me $10 million, since the two sums net out.

    Yet the notional value of this transaction is $1 billion. Importantly, **neither you nor I could ever, or will ever, be on the hook for that amount. The $1 billion notional value is simply a reference point, and has little to do with the risk involved in our transaction**

    Taking this into account, the current netted value (gross credit exposure) of derivatives is closer to half a trillion dollars. This is still a vast sum -- and capable of causing massive disruptions -- but it's nothing close to the $200 trillion figure thrown around, undoubtedly in the calculation of this graph.

    FWIW,

    Morgan

  • Report this Comment On March 23, 2011, at 8:24 PM, TheDumbMoney wrote:

    I do not think a bubble in asset X is defined either by the percentage of total assets allocated to asset X, OR by the percentage of total world assets that asset X constitutes.

    Rather, a bubble in asset X is defined solely by the currently appraised price of asset X versus the fundamental value of asset X. When the appraised price is much higher than the fundamental value, that is a bubble. Period. Thus, I view the chart as simply irrelevant.

    Of course, the chart is meant to speak to that, because it is meant to imply that gold's appraised price is nowhere near its fundamental value because the percentage of gold and related companies as a percentage of total assets is nowhere near a "norm" that is measured only back ninety years. That is in its essentials a technical analysis, not a fundamental one, and moreover there are the potential data problems others have pointed out.

    Additionally, I am very unimpressed by apocalyptic worries about "derivatives." First of all, there are a bajillion kinds of derivatives. Your call options? Those are derivatives. Second, I don't think people who are worried about derivatives understand the concept and implications of the term, "notional amount." Third, these are largely private transactions, so even if they all generate losses, only parties to the contracts lose. Yes, systemic risk can result, but governments can mitigate that, for example and in part, by increasing liquidity, and also by not stupidly taking over/nationalizing the liabilities of banks that lose the money (I'm talking to you, Ireland). For example, one thing a purely hypothetical central bank and/or Congress might try to do is artificially increase the reserves of banks so that they can unwind losing positions over a longer period of time in a way that is less cataclysmic to them, and/or suspend mark-to-market rules. It is also possible that derivates that showed as huge losses in 2008 because of accounting rules such as, oh, say, Berkshire's derivatives bets on the stock market, will not in fact be huge losses in the end. And of course there is the fact that since they are all (derivatives) two-way contracts, there will generally be a "winner" and a "loser" (of money) no matter what.

    Greetings, Chris, it has been awhile. I very much agree with you that for a variety of reasons, gold will continue to appreciate in its appraised value relative to the dollar, as will silver, for a minimum of the next year, and possibly for as much as the next three or four years. Leveraged miners will go up even moreso. That is, unless we face another 2008-style liquidity crisis, in which case it will all drop like a stone, just as it did then, as people fled to cash so they could pay bills. If that happens, who knows, maybe I'll be a buyer!

  • Report this Comment On March 23, 2011, at 8:26 PM, RRobertsmith wrote:

    1929 and 1980 really bad years for the stock market and really good years for gold. (The graph crossing years!) are you saying there going to cross again?

    gold 3000 and dow 3000?

  • Report this Comment On March 23, 2011, at 10:00 PM, TMFMMTInvestor wrote:

    Chris,

    Former gold bug/Austrian Schooler/monetarist here (and one who isn't necessarily opposed to riding the back of this gold rally which has relatively solid supply/demand fundamentals).

    Two quick questions regarding your twin statements that (1) "gold is money" and (2) gold is "the ultimate currency":

    *What do you mean by "money"?

    *How do you define "currency" (and "ultimate currency" for that matter)--not talking about "currency held by the public," but an official national currency?

    Gold is a commodity which has minimal industrial and commercial utility (specialized applications and jewelry). It also has become a financialized asset, but that's another discussion altogether. It seems to me, however, that it is factually inaccurate to describe gold as either "money" or "currency."

    Given that gold is not a unit of value that is widely used for settlement of social credit/debt relationships (of which exchange is part), it is not "money." Full stop. And given that gold is not institutionalized money, i.e. a legal institution--the unit of account declared by a sovereign authority for tax payment in which all other "money things" are denominated (e.g. credit, bank reserves, cash, various Treasury securities, coins, checks, etc.), it cannot be a currency in any coherent sense.

    You (and any followers of this discussion) may be interested in these in-depth writings on the nature of money and currency:

    Innes, A. Mitchell. 1913. “What is money?” Banking Law Journal, 30 (5): 377-408.

    http://moslereconomics.com/mandatory-readings/what-is-money/

    "Money"

    http://www.levyinstitute.org/pubs/wp_647.pdf

    "Money in Finance"

    http://www.levyinstitute.org/pubs/wp_656.pdf

    "Money-An Alternative Story"

    http://www.cfeps.org/pubs/wp-pdf/WP45-Tymoigne-Wray.pdf

    The Austrian School's faith-based belief that money is a natural invention of the private sector, whose actors organically settled on gold is a myth devoid of historical evidence.

    I am afraid you (and they) are making two philosophical mistakes: (1) that of assuming that the thing (money/currency)--the institution really--is the same as the material form it has taken at various points in history, and (2) the further derivative assumption that this one particular material form (gold) that money has taken among many throughout history is the thing/institution itself.

    Saying "gold is money" or "gold is currency" is like me saying that "paper is money" or "paper is currency" just because the most common visible material form of money today is a paper note (although even that is quickly changing). All of the above four statements in quotes are equally absurd.

    That a given commodity is a store of value (whether in perception or in reality) that cannot be destroyed by nefarious central bankers does not make it either money or a currency. The mere assertion thereof, however, is a nice rhetorical flurish. I'll give you that.

    Respectfully,

    Scott

  • Report this Comment On March 23, 2011, at 10:32 PM, buffalonate wrote:

    When the deficit gets under control the fear will subside. When fear subsides so will the value of gold.

  • Report this Comment On March 24, 2011, at 12:28 AM, TMFMMTInvestor wrote:

    Why should the deficit cause fear? If one understands what the deficit is, it is obvious that it is irrational to be afraid of it.

  • Report this Comment On March 24, 2011, at 12:29 AM, marc5477 wrote:

    Never buy anything that you dont need. Simple and straight forward. Gold is only useful as a conductor. Is it worth the current price for that application? Nope because we have alternatives that do just as well for much less.

    The only real argument for gold is that human intelligence is low and it doesnt seem to be getting any better. As long as people remain stupid and complacent gold will be valuable. The question is, will this last?

    The smartest people in the world are not buying gold. Arabs are buying gold (I'm Arab btw)... who do you want to follow? Warren Buffet & Donald Trump or Ahmadinejad and Chavez? To all their own.

  • Report this Comment On March 24, 2011, at 3:23 AM, ryanalexanderson wrote:

    To marc5477:

    Sorry, did you just list -Donald Trump- as one of the smartest people in the world?

    What, is it his ability to repeatedly scrape through bankruptcy proceedings, or his deft mastery of the combover that won you over?

    And BillyTG's comment at 6:54 has some pretty solid arguments for gold. If you call this "stupidity", then yes, I'll ride this 4000 year old bull run.

  • Report this Comment On March 24, 2011, at 5:28 AM, XMFSinchiruna wrote:

    TMFHousel,

    "Taking this into account, the current netted value (gross credit exposure) of derivatives is closer to half a trillion dollars."

    That is incorrect. The gross credit exposure of global derivatives is $3.58 Trillion.

    http://www.bis.org/statistics/otcder/dt1920a.pdf

  • Report this Comment On March 24, 2011, at 6:05 AM, XMFSinchiruna wrote:

    TMFMMTInvestor,

    I didn't realize there was such a thing as a "former" Austrian Schooler. :)

    "It seems to me, however, that it is factually inaccurate to describe gold as either "money" or "currency.""

    Certainly not so! The reaction in gold's price to the severe impairment of the USD and Euro is flashing like a glaring neon sign reminding Fools that gold has never ceased to be money.

    Surely you will concede that gold remained an "official" currency of the land through 1971, when Nixon "temporarily" (his word, not mine ... not that his word meant anything) halted the international convertibility of USD to gold. Moreover, gold is indeed still an institutionalized form of currency in the U.S., as the U.S. Mint continues to produce gold coin denominated in USD. Despite the obvious disincentive against spending said coinage at face value, technically the fact remains that gold as money retains the institutionalized backing of the U.S. Mint. Full stop.

    Do you propose that the Federal Reserve carries gold on its balance sheet sole because of its "minimal industrial and commercial utility"? Of course not ... to suggest so would be disingenuous. The Federal Reserve carries gold on its balance sheet because it, as an institution, recognizes gold's monetary role.

    But you see, gold has never been the currency of just one nation, it has been, and continues to be a global currency recognized by all nations as -- to use Greenspan's words, "the ultimate source of payment".

    There is also the pesky matter of the U.S. Constitution, in which our founding fathers clearly sought to ensure that we never fall victim to the perils of unbacked paper currency as they had witnessed themselves in their time. "No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility." By extension, the Constitution defines currency, or tender, as gold and silver.

    In any event, you are welcome to employ your definitions of money and currency that suit you in feeling comfortable with the unbacked fiat monetary structure. If a 1.5 trillion-dollar federal budget deficit won't give you pause, then I certainly wouldn't wouldn't imagine the vulnerability of free-floating paper currencies to cause you an ounce of concern.

  • Report this Comment On March 24, 2011, at 6:34 AM, XMFSinchiruna wrote:

    ETFsRule,

    "It's intuitive, it makes sense, and it works. But you will continue to ignore this method because you don't like the results. Instead, you compare gold to "assets", even though you know as well as I do that this is a deeply flawed comparision."

    Completely unwarranted and totally unfair. After you mentioned Paul van Eeden elsewhere and linked to another analysis looking at gold and global money supply, I perused the material with great interest and wrote a note to myself to look into those further. I have bookmarked Paul van Eeden's Gold page, and I intend to review his material thoroughly.

    I have always aimed to approach the topic of precious metals from a perspective that gives due consideration to any and all well formulated ideas on the topic, whether in pro or in con. Anyone who is unable to view arguments on both sides of an investment thesis with genuine interest has no business laying real money on the table.

    "Lastly, if you're going to make a specific price target of $2000, then the onus is on you to explain yourself for the benefit of your readers."

    Poppycock! How many times a week will financial tv present guests to offer their free-flowing target prices for oil, currencies, market indeces, volatility, what have you? Price forecasting is everywhere an exercise in informed speculation, and I owe nothing to anyone in regards to how or why $2,000 has remained my (increasingly) conservative price target since 2007. DYODD.

  • Report this Comment On March 24, 2011, at 6:44 AM, XMFSinchiruna wrote:

    I am presently in contact with the author of the relevant Erste Group Gold Report. I will provide further information regarding the underlying data as available.

  • Report this Comment On March 24, 2011, at 8:12 AM, fuzzywzhe wrote:

    You want to see something interesting?

    Graph the US national debt in terms of gold. It goes nearly linearly up from 1980 to 2000, and it's going nearly linearly down from 2000 to 2017 or 2020, depending.

    I've done the work to do this, but I'm not sharing.

    But I will say this, $5,000 gold is not hysteria, and even $20,000 gold might not be, but if we get there, we're certainly at a peak.

    I calculate the national debt will be about $33 trillion by 2020 based on the fact that since 1971 until about today, the national debt has grown on average at about 9.4% a year.

    In 1980, the national debt was about 1 billion ounces of gold, when gold was valued at $500 an ounce (not $800).

    33 trillion / 1 billion = $33,000 an ounce.

    Like I said, if we get there, we'll be at a peak, and really $5,000 won't be a heck of a lot of money anyhow. Get ready for the ride of your life boys and girls, next decade is going to be HARD.

  • Report this Comment On March 24, 2011, at 8:24 AM, nicholasgold wrote:

    My field is not economics--rather it is history. The sophistry displayed by some comments as to what is money and what is currency leads me to make a little recommendation: For some light bed time reading, try Gibbon's "Decline and Fall of the Roman Empire." It is astounding to me from my perspective how history invariably repeats itself. When the tipping point occurs which is when the dollar is no longer considered the reserve currency of the world, Mr. Bernanke or one of his successors will be left with nothing but a Weimar Republic scenario. I am not a prophet, but the inevitable will happen, and one prediction I am willing to make, the axe will fall on a weekend.

  • Report this Comment On March 24, 2011, at 8:25 AM, ETFsRule wrote:

    "Completely unwarranted and totally unfair. After you mentioned Paul van Eeden elsewhere and linked to another analysis looking at gold and global money supply, I perused the material with great interest and wrote a note to myself to look into those further. I have bookmarked Paul van Eeden's Gold page, and I intend to review his material thoroughly."

    In that case I apologize, and retract my statement.

  • Report this Comment On March 24, 2011, at 8:33 AM, dag154 wrote:

    " There are lies, dam lies and statistics ... " (Mark Twaine).

  • Report this Comment On March 24, 2011, at 8:56 AM, Jbay76 wrote:

    +1 for Sinchi's ability to tackle on all the critics in such a manner and +1 rec for BillyTG

  • Report this Comment On March 24, 2011, at 10:17 AM, TMFHousel wrote:

    My bad Chris; right you are. I was looking at a 2010 source, and netted current credit exposure. Even so, at $3trillion+, the same argument holds. It's a small fraction of the notional value.

  • Report this Comment On March 24, 2011, at 10:22 AM, XMFSinchiruna wrote:

    TMFHousel,

    Yes, there is a large divide between the two figures. For now we'll defer discussion of the relevance of notional value for another day.

  • Report this Comment On March 24, 2011, at 11:17 AM, TMFMMTInvestor wrote:

    Chris,

    You still haven't provided at least your working definition of both money and currency (beyond assuming the consequent that "gold is money/currency"). I have defined both, currency as a species (specific type) of money (the more general category).

    Gold has never really been money; it has, however, been the material form that money and currencies have taken at various points in history. The two are very different. I would encourage you to read the papers I shared as a start.

    Regarding your questions:

    No, I will not concede that gold remained an "'official' currency" throughout 1971. The USD has always been the currency, and convertibility to gold at some fixed rate has sometimes been a feature of that currency. But convertibility is not an essential property of a currency (and neither is a legal tender requirement). This time, you are confusing an optional feature with the thing itself.

    A gold coin produced by the US Mint is yet another of what are properly called "money things" (others, e.g. are bank reserves, Federal reserve notes, credit, Treasurys, etc.). Broadly speaking, yes, they are money, but it is not their material form that makes them so. Many "money things" today have a purely electronic existence. And so, no, coins from the US Mint are not a currency; they are one of several money things denominated IN THE currency, which is the US$.

    I have no idea why the Federal Reserve System keeps gold as an asset on its balance sheet. Irrelevant. I wouldn't per se have a problem with the Fed getting rid of it, as it doesn't need it. The US Federal government's gold holdings has no bearing on its ability to issue US dollars.

    As for the US Constitution, I believe the section you quote precludes THE STATES from issuing a currency in some other form and reserves that right to the Congress via the Treasury. And again, the determination of what material form a currency takes will vary across the ages from country to country and is a purely voluntary political constraint changeable at will. As I've said ad nauseum, neither money nor currency are equal to the material form they take.

    The $1.5 trillion budget deficit does give me pause, but not in the sense that you imply. There is no solvency issue with a sovereign monopoly issuer of a free-floating non-convertible currency. It is merely an ex post accounting identity which reflects the extreme savings desires/liquidity preferences of the over-indebted, revenue-constrained private domestic sector (whose savings proclivities at present ARE the recession). To anyone who understands the basic financial sectoral balances of a global economy, this is par for the course. The deficit is mostly a function of the poor state of the economy (and the automatic stabilizers kicking in), and not the other way around. What we need is growth, after which the deficit will take care of itself naturally. At any rate, deficits and debt are very poorly understood and are not a problem at all in terms of real fiscal sustainability (e.g. Peter Schiff, Reinhart & Rogoff, most politicians, etc.). Those who assert otherwise, with all due respect, are simply using outdated economic theories that no longer apply. (This would require a much longer post.)

    What gives me pause is the real balance sheet recession on Main Street, very high unemployment, and lost productivity because neoclassical economists and politicians worry about non-problems like the need for balanced budgets and so-called "fiscal sanity." These people simply do not understand the monetary system of which they are the stewards. THAT is what scares me.

    The fiat monetary system is still relatively young and very poorly understood, as everyone is still thinking in gold standard terms and there remain some legacy gold standard legal requirements. That will change with time as understanding improves.

    As we worry needlessly about becoming like Greece, we risk more and more becoming like Japan.

    Best,

    Scott

  • Report this Comment On March 24, 2011, at 12:13 PM, wasmick wrote:

    "I fully understand the chart, though I was not privy to the calculations behind it. By your logic, and that of the commenters above, no one may print a chart derived from data in a published report from a professional research group without first essentially repeating the research behind the report. "

    Thanks for the thoughful reply, Chris.

    I disagree with the point above primarily due to the conclusion to which you had to jump in order to attempt to make it.

    That said, I understand where you're coming from, particularly in terms "proving a negative". However, the headline of your piece is "Proof that Gold is Not a Bubble", so it would seem to me that - regardless of who wrote the headline - the onus would be on the author of the article to actually prove it.

    Clealry the article doesn't come close to accomplishing that.

  • Report this Comment On March 24, 2011, at 12:23 PM, TMFMMTInvestor wrote:

    Chris,

    For the sake of clarification, I should also say that I sympathize with your view that gold is not (with my qualifier "yet") a bubble. And your conservative price target isn't per se unreasonable. We both believe gold's price will likely go higher in the coming months and years. The supply/demand fundamentals are in many ways very strong and it has a robust technical chart, as well.

    It matters little whether the inspiration for the demand is well-founded (your position) or not (my position): it is there and it is growing, and that is all that matters for positive price action. (In this sense, gold is the ultimate "Keynesian beauty contest" in which the truth about its character and function is not determinative of its future market price.)

    The demand will eventually collapse, as well it should, at which point the price action will not be pretty. But when that happens is another question altogether, and one that is impossible for me to answer. I would be a holder, not a new buyer, of gold at this point.

    Scott

  • Report this Comment On March 24, 2011, at 4:10 PM, XMFSinchiruna wrote:

    Scott,

    I appreciate your deep foray into the nature of money and currency, and I understand your wish to set very precise definitions so that we can discuss the topic through common parameters. I will be happy to review the articles you have posted when I have a moment (assuming I can find a moment) compare them with my own constructs for how I define the terms, and continue the discussion either here or at our next opportunity.

    With that said, please do not take the following rebuke personally:

    Forgive me, as I consider it my responsibility in the best interest of my readers to sharply address your above statement: "I have no idea why the Federal Reserve System keeps gold as an asset on its balance sheet. Irrelevant. I wouldn't per se have a problem with the Fed getting rid of it, as it doesn't need it. The US Federal government's gold holdings has no bearing on its ability to issue US dollars."

    Let's work backwards from the end of that statement. First, the Federal Reserve is not a part of the US Federal government, and therefore it is incorrect to refer to those as the federal government's gold holdings. Second, and far more importantly, it is completely ludicrous to suggest that stripping all gold reserve holdings from the account of the world's most widely held reserve currency would have no bearing on the Fed's ability to issue U.S. dollars. You're talking about reported holdings (they've never been audited) of 261.5 million troy ounces of gold, with a present market value (as distinct from its carried value) of more than $375 billion, and representing some 74% of our central bank's forex reserves.

    If you believe that dissolution of that gold position would lead to anything other than an unthinkably violent and catastrophic end to the U.S. dollar involving wholesale Treasury liquidations, mutli-level sovereign credit downgrades, and an unthinkable hyperinflationary maelstrom, then I suggest you study the matter quite a bit more closely. I encourage you to ask any credit agency , or a bond investor like Bill Gross, for that matter, for comment on whether they share your cavalier assertion that the Fed's gold holdings are "irrelevant" to the United States' credit rating or its ability to issue USD debt. Seriously, do you really believe what you're saying there? And now, to your admission that you have no idea why the Federal Reserve holds gold on its balance sheet, all I think to say is: "Good grief, Charlie Brown!".

    Now, thank you for not taking that personally.

    Moving on to your comment immediately above, I understand your hesitation to seek exposure to gold if you do not feel that concerns about further impairment of purchasing power of the major reserve currencies are warranted. If you are comfortable with the outlook for the U.S. dollar under the present circumstances, then it would seem Treasuries would be a proper fit for the sort of allocation you might otherwise have sought for gold. [Correct me if that is not a fair statement, as I am making a presumption there]. I hope that is not the case, as I truly am concerned for the welfare of investors with significant exposure to long-dated Treasuries at this juncture. Bill Gross could not have been clearer.

    I could scarcely disagree more with your characterization of gold above (i.e. that "the truth about its character and function is not determinative of its future market price"). We'll have to agree to disagree on that point, as I believe you are witness to the true character and function of gold, but perhaps fail to see it for what it is.

    Finally, although I am personally heavily allocated in precious metals, I have not sought to recommend similar allocations to gold for others (I consider matters of allocation highly personal topics for each investor to devise on their own), but rather I have stated merely that I consider "some" exposure warranted under the circumstances. If you do think gold prices are likely to hit my $2,000 price target, it would seem that by not dipping your toes into even a very small position in one quality mining stock like Goldcorp might be akin to intentionally passing on an historic investment opportunity that you could see coming. Far be it for me to tell anyone specifically how to invest their capital, but I wanted to raise the point purely for illustrative purposes.

    Scott, thank you for the discussion. I truly hope no offense is taken to some of my responses above, and I do very much appreciate your willingness to engage in open dialogue about these tremendously important topics.

    Fool on!

    Chris

  • Report this Comment On March 24, 2011, at 5:03 PM, XMFSinchiruna wrote:

    wasmick,

    Thanks for your thoughts. I also concede that "proof", like "truth", is seldom subject to a single, universal interpretation under the best of circumstances.

  • Report this Comment On March 24, 2011, at 6:25 PM, jhegedus wrote:

    Can someone fill the gaps between

    1928

    1932

    1948

    1981

    2009

    ?

    I am a supporter of gold and silver, but this graph is NOT objective. Let's get an objective one to convince the intelligent investors. Look forward to any links or data sources.

    Thanks in advance for helping to expose reality!

  • Report this Comment On March 24, 2011, at 8:11 PM, XMFSinchiruna wrote:

    jhegedus,

    You may not consider the graph "objective", but it is meaningful and instructive nonetheless. Those years were obviously selected for didactic purposes, as they correspond with significant historical snapshots with a high degree of relevance to gold market dynamics. Fools are free to limit the conclusions they draw as a result of the limited data set.

  • Report this Comment On March 24, 2011, at 8:37 PM, NOTvuffett wrote:

    Wow Scott, dazzled by your brilliance- "A gold coin produced by the US Mint is yet another of what are properly called "money things" (others, e.g. are bank reserves, Federal reserve notes, credit, Treasurys, etc.)."

  • Report this Comment On March 24, 2011, at 8:42 PM, NOTvuffett wrote:

    Sinchi,

    I got caught up in this idiocy, what I really wanted to ask you is to post some facts on supply and demand for silver going forward. Some people think it is about hoarding shiny metal. I wouldn't have the slightest interest in it if it wasn't a vital metal.

  • Report this Comment On March 24, 2011, at 9:01 PM, XMFSinchiruna wrote:
  • Report this Comment On March 24, 2011, at 9:20 PM, catoismymotor wrote:

    Sinchy,

    Don't let them get you down. You have DD and years of success with your ideas under your belt.

    Cato

  • Report this Comment On March 24, 2011, at 9:54 PM, skypilot2005 wrote:

    TMFMMTInvestor

    "What gives me pause is the real balance sheet recession on Main Street, very high unemployment, and lost productivity because neoclassical economists and politicians worry about non-problems like the need for balanced budgets and so-called "fiscal sanity." These people simply do not understand the monetary system of which they are the stewards. THAT is what scares me."

    “As we worry needlessly about becoming like Greece, we risk more and more becoming like Japan.”

    Are you saying that inflation has been permanently vanquished?

  • Report this Comment On March 24, 2011, at 10:19 PM, NOTvuffett wrote:

    My own life experiences have given me firsthand knowledge of the information in your posts "how silver is mined". I have seen the assaying process in the lab. I have seen the core samples for the test drilling (although I have never seen them actually drilling). This is a subject for another day- how they use a statistical model of core data to estimate reserves.

    I have been down in mines. Actually worked in a mine one summer. It sucks... but getting to handle the explosives is pretty cool, lol.

    I don't think most people understand that silver is seldom the primary metal being mined. It is usually an adjunct and the cost of extracting it must be computed accordingly. Maybe it would be helpful if you explained this point.

    Just a fun fact: silver is one of a few that sometimes occur in native form, and sometimes it has a form like steel-wool.

  • Report this Comment On March 25, 2011, at 12:19 AM, TMFMMTInvestor wrote:

    @ skypilot2005:

    "Are you saying that inflation has been permanently vanquished?"

    Nope. I'm saying that there are a deflationary forces at work in the economy that few fully appreciate, in part due to a misunderstanding of how radically different our monetary arrangements are from the gold standard system we used to be on. There's a decent chance we'll tread water for another 5-10 years or hit lower lows because the private sector's problems are much worse than people think, IMHO.

  • Report this Comment On March 25, 2011, at 12:45 AM, whereaminow wrote:

    @TMFMMTInvestor,

    We haven't been on a gold standard since 1933. Before that, we were on a pseudo gold standard from our entrance into WWI in 1917-1933.

    The "balance sheet" recession is as clear cut a case of malinvestment due to expansionary monetary policy that the world has ever seen.

    There can never be deflationary pressures under a fractional reserve banking system with carte blanche to bailout insolvent banks.

    Deflation is PERSISTENT fall in the general price level. Not only has there been NO deflation during this recession, there has been no worldwide deflation in over 50 years.

    There is and always will be inflation under a paper money currency. The links you posted above have been refuted numerous times.

    MMT is the State Theory of Money most popularized by Knapp. But its true origin is Chartalism (or better known as Hut Tax Theory, the idea that taxation gives value to money.)

    The Innes "What is Money?" article is devoid of scholarship that it should just be laughed at.

    Just on the subject of Roman coins, one could read any of the following and see why Innes is batsh*t insane:

    Jean-Philippe Levy, The Economic Life of the Ancient World

    Roland Kent, "The Edict of Diocletian Fixing Maximum Prices"

    H. Michell, "The Edict of Diocletian: A Study of Price-Fixing in the Roman Empire," The Canadian Journal of Economics and Political Science, February 1947

    Frank Abbot, The Common People of Ancient Rome

    M. Rostovtzeff, The Social and Economic History of the Roman Empire

    Edward Gibbon, The History of the Decline and Fall of the Roman Empire

    Any one of those books will give you a better understanding of money in the ancient world than Innes' superficial review.

    As for Mosler, who is really nothing but a Statist peddling re-packaged Keynesian solutions under a Chartalist banner,

    http://conant.economicpolicyjournal.com/2010/11/refutation-o...

    David in Qatar

  • Report this Comment On March 25, 2011, at 1:10 AM, NOTvuffett wrote:

    David, the cry to end the Fed must be gaining traction. Today they announced they would hold a press conference 4 times a year, lol.

  • Report this Comment On March 25, 2011, at 1:41 AM, whereaminow wrote:

    @NOTV,

    Now, that's transparency! =D

    David in Qatar

  • Report this Comment On March 25, 2011, at 6:36 AM, dbtheonly wrote:

    TMFSinchiruna @ 8:11 last night.

    Okay the graph shows that Gold Mining Stocks used to be a major portion of national value. Fine. So did Buggy Whips, Horses, & Slaves. So what? The fact that since 1981 there has been an entire electronics information industry grow to massive proportions? That seems a bit obvious, even for us fools.

    I'd also like to point out that there was a very good reason to drop the Gold Standard. The short version is that with goods, services, & "stuff" to buy at a much higher rate than gold is mined, deflation is inherent in any gold standard of coinage. This was proved by the deflationary panics of 1837, 1857, 1873, 1929.

    The Silver/Gold arguments of the later 1800s are interesting & scarily relevant to today.

  • Report this Comment On March 25, 2011, at 6:42 AM, skypilot2005 wrote:

    TMFMMTInvestor wrote:

    “Nope. I'm saying that there are a deflationary forces at work in the economy that few fully appreciate, in part due to a misunderstanding of how radically different our monetary arrangements are from the gold standard system we used to be on. There's a decent chance we'll tread water for another 5-10 years or hit lower lows because the private sector's problems are much worse than people think, IMHO.”

    Your fears of deflation appear to be unwarranted.

    I hope you don’t mind but I’d like to present some current facts as opposed to your conjecture.

    The P. P. I. Rose 1.6% last month which is equal to an annual pace of nearly 20%. Over the past 5 months the index has increased by nearly 5%, which is equal to an annual pace of over 10%. The index for food increased by almost 4% last month alone which is the largest increase since November 1974. Ah, 1974. Stagflation. Those were the days….

    An inflationary trend is now starting to manifest itself in even the C. P. I. of which 40% is housing and housing is still in a recession.

    Gold rises. The dollar falls. Commodity prices rise. Oil over $100 per barrel as an example. Deflation? Hmmmmm. I respectfully disagree.

    I’ve seen this movie before. It doesn’t end well for those who do not have their portfolios allocated properly.

    One more observation. Did you think about the following statement you made, above?

    “The fiat monetary system is still relatively young and very poorly understood, as everyone is still thinking in gold standard terms and there remain some legacy gold standard legal requirements. That will change with time as understanding improves.”

    Are you holding yourself out as having superior knowledge of this subject matter?

    I would like to remind you that there are very smart people who spend enormous amounts of time analyzing this subject matter. I find your statement naïve, at best.

    Fool on

  • Report this Comment On March 25, 2011, at 7:05 AM, XMFSinchiruna wrote:

    whereaminow,

    Thank you for the most valuable gift of all: time.

    TMFMMTInvestor,

    I just spent 5 minutes reviewing the links you provided. I found no incentive in the wholly unimpressive content thereof for me to invest further time.

  • Report this Comment On March 25, 2011, at 2:25 PM, TMFMMTInvestor wrote:

    Chris (and other gentlemen),

    No hard feelings. And sorry to have wasted your time, although I am still wondering what your definition of money and currency is in one or two pithy sentences.

    For the record, I'm in favor of abolishing the Fed, which is a creature of Congress and works minute by minute in tandem with the US Treasury, to whom it remits its "profits" at year end ($80b in 2010). Yes, it's beholden to the big banks. Yes, it has corporate legal standing, but for all practical purposes it is a central part of the consolidated financial arm of the US government and is audited up the wazoo by the GAO. Even including potential off-balance sheet shenanigans, to say it's not part of the US government is really too simplistic and only true in a limited sense.

    Re: the Fed's gold holdings (where I was admittedly somewhat cavalier):

    To clarify, my understanding is that the NY Fed holds gold bullion on behalf of numerous countries, central banks, and multinational institutions. Obviously, summarily selling that is neither possible nor desirable, as it's just held in trust as a gesture of goodwill for said entities. So, I was really referring to the US gold reserves in Fort Knox, slightly smaller in size. There are numerous reasons why it wouldn't make sense to sell these, chief among them that any sale would likely push down the gold price and diminish the nominal wealth of many US citizens who own gold. But, aside from political pressure to hold gold reserves, I don't see what operational or mechanical power accrues to the US government from owning $375 billion in gold bullion. It doesn't further our ability to issue currency or Treasury securities. That's the basic point I was aiming at. Perhaps you could dedicate a MF article to why we hold gold reserves.

    I, too, don't have the energy to unpack what I consider to be the various misconceptions/misunderstandings involved in several replies above. Your and David in Qatar's summary dismissal of Minskian/Post-Keynesian economics/MMT (neo-chartalism) is not proof of any error and it is devoid of deep engagement.

    It may be best to recognize that we're operating from different first principles, so we're unlikely to get very far here. Since I imagine you all are coming from a more Austrian School perspective, you might be interested in the following when you have the time:

    Vijay Boyapati, “Why Credit Deflation Is More Likely than Mass Inflation: An Austrian Overview of the Inflation Versus Deflation Debate,” Libertarian Papers 2, 43 (2010).

    http://libertarianpapers.org/2010/43-boyapati-why-credit-def...

    Ed Harrison (a devotee of Kindelberger, Mises, and Hayek who's incorporated some aspects of MMT in recent years):

    "MMT for Austrians"

    http://www.creditwritedowns.com/2010/11/mmt-for-austrians.ht...

    Mike "Mish" Shedlock (a pretty hardcore Austrian who's friends with James Turk, buys bullion for client accounts, is bearish on the USD, and wants to abolish the Fed, but has come to understand that the traditional money multiplier is a myth and that deflation is a valid concern):

    "Failure to Consider Constraints"

    http://globaleconomicanalysis.blogspot.com/2010/11/failure-t...

    "Fictional Reserve Lending And The Myth Of Excess Reserves"

    http://globaleconomicanalysis.blogspot.com/2009/12/fictional...

    "Fiat World Mathematical Model"

    http://globaleconomicanalysis.blogspot.com/2009/02/fiat-worl...

    Best,

    Scott

  • Report this Comment On March 25, 2011, at 5:51 PM, whereaminow wrote:

    Scott,

    You may be surprised to find out that I've already read all of those. And like Deflationists they have provent to be in error. Bob Murphy's response to Vijay, Gary North's rebuttal of Mish, and Bob Roddis'/Tyler Conant's take down of Mosler, plus the original: Mises' destruction of Knapp in Theory of Money and Credit.

    Nothing has changed except the marketing. The Pragmatic Capitalist and his merry band have no answers.

    And all of their predictions have been proven wrong.

    David in Qatar

  • Report this Comment On March 25, 2011, at 6:03 PM, whereaminow wrote:

    To follow up, since I'm pressed for time, I'll just pass along some of the investigation I have done on MMT:

    TPC's terrible anti-gold fallacy:

    http://caps.fool.com/Blogs/the-absolute-worst-of-the/493944

    What MMT has to offer:

    http://caps.fool.com/Blogs/a-closer-look-at-modern/490033

    MMT follow up:

    http://caps.fool.com/Blogs/its-called-a-jump-to/522770

    If you have anything new and interesting to say, I welcome an open debate on CAPS. I've covered all of the material you have linked to and more. I care little about Money Multiplier Theory. It's not an Austrian theory.

    If you can dispute that Savings is an Action that is not dependent on paper bills, we might get somewhere.

    As it stands, MMT is modern chartalism. Much has been written about this in the history of economic thought. It's not "modern" monetary theory.

    Outside of MMT's descriptive work on Fed operations (which is quite good at times, but in no way contradicts the idea that the Fed is a giant counterfeiting operation), it offers little.

    Besides that, MMT's two leading spokesmen Warren Mosler and L. Randall Wray are certifiably insane and would be more at home in a mental institution than in a global market.

    David in Qatar

  • Report this Comment On March 25, 2011, at 9:12 PM, peters46 wrote:

    Three points.

    1. While I can see how any youngster not of age in the 70s could believe 'severing the ties between gold and the dollar set the stage for the inflation of the 70s', that was more coincidence than cause and may have affected the degree somewhat, but the cause was the oil embargo and the inflation would have happened with or without cutting the ties.

    2. Before Europeans got to this area (southern OR coast), native Americans considered gold to be a useless, soft metal.

    3. I consider gold to be a commodity. As such it would follow the economic rule I once read about which stated that all commodities eventually go down in (relative) price, because they become too expensive and use ceases, or a subsstitute is found to do the same job cheaper. Gold has a few uses, especially in electronics, jewelry and dentistry.It has gotten to the price where those uses are disappearing. Its main use is in safeguarding value in case of currency devaluation (inflation). I am looking to the future when prices have risen so much, or the unemployed are in such dire straights, that many people holding gold will feel a necessity to sell gold to eat or make mortgage payments or get medical care. And a large sell off would feed upon itself. (back under $1000 IMHO). I have no idea when, but 'they' are already predicting food price increases in 2011 to be double those of 2010.

  • Report this Comment On March 28, 2011, at 6:19 PM, TheDumbMoney wrote:

    peters46, I think that ultimately gold is whatever we decide it is. To me that is why the conversations about 'what it is' are so fraught (is it commodity, money, both, etc., etc.): The argument itself has meaning, because the number of people who believe it is money itself has powerful practical significance. So I think the argument about whether it is money very often resolves to an argument about whether we want it to be money or not. Personally, I do not want gold to be money. I love our floating fiat currency.

  • Report this Comment On March 28, 2011, at 6:53 PM, anuragupta wrote:

    My understanding is that all forms of money is simply an exchange medium for goods and services. Therefore I see no value in investing in any form of currency. I would rather invest in goods and services.

    People are afraid of the fall in soft currencies wrt precious metals. But for that to be sustainable the value of goods and services measures in terms of those falling soft currencies must rise.

    What am I missing?

    Anurag

  • Report this Comment On March 29, 2011, at 5:22 PM, TMFHousel wrote:

    Chris,

    Just curious: Were you ever able to track down how the chart was calculated?

    Morgan

  • Report this Comment On March 31, 2011, at 11:26 AM, fc95082 wrote:

    When I plot CEF vs SLV on a chart, SLV has done way better. Is that because SLV is a pure silver play and the gold/silver ratio has fallen or is it because CEF's management fees are higher or something else? I cannot find anything about CEF's fees or its value over or under NAV. Please help.

  • Report this Comment On April 16, 2011, at 7:34 PM, goldnewnew wrote:

    I'm new in this stuff but just drop some comments:

    I think silver/gold are overpriced now because:

    1. of course fear of inflation

    2. rising US debt sealing hence more QE

    3. china/the chinese buying silver

    4. people overreacting to china buying silver

    5. people trying to get the so called 1:16 ratio and then sell

    6. banks becoming buyers rather than sellers

    7. conspiracy theories: china government confiscating silver (they have it in banks anyway); ETF not having all physical they say; china calling up the physical from ETF

    something I do agree is nowadays gold is somehow useless, it has been substituted in most of its industrial use.

    maybe will be better rather than floating currency or 100% gold backed up currency a backed-up-compound currency... that is 20%gold, 20%silver, etc.... it is what China is somehow doing by stockpiling commodities

    anyway I'm not an expert, but maybe some points make sense

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