Gold - I we still cavemen?

[johnhenry]

If you understand all that and still advocate a monetary policy that targets 0% inflation..... I'm not sure what else can be said.

To be honest, I don't advocate any monetary policy. I would convert the Federal Reserve into a petting zoo.

Well that's an easy way out of the discussion.  A government cannot issue currency without having a monetary policy.  It has to spend money on something, whether it's bombs, roads, educational institutions, space programs, programs to support disabled and elderly folks.  And it has to tax something, whether that's income, wealth, etc.  To be clear, it doesn't need to tax in order to spend, but to give value to the currency.   The mixture which a government does those things, in addition to the regulations it places on banks, which also have the privilege of creating money is what makes up the monetary policy.

The main revelation of MMT and chartalism is that money is in fact a creation of the state.... and therefore it's existence can't be separated from law itself, nor from the policies that state puts in place to spend and tax back that currency.  If your goal is to not have to worry about those policies and their implications, sure it would be nice if gold would play along and readily make itself available to our government at the exact rate that we needed it and then disappear when we didn't need so much.  But the government that creates the money cannot remain agnostic on the matter.  Every tweak to nearly every law, effects the very nature of what our money is.

Which gets us back to the Abraham Lincoln quote:

The privilege of creating and issuing money is not only the supreme prerogative of Government, but it is the Government's greatest creative opportunity. By the adoption of these principles, the long-felt want for a uniform medium will be satisfied. The taxpayers will be saved immense sums of interest, discounts and exchanges. The financing of all public enterprises, the maintenance of stable government and ordered progress, and the conduct of the Treasury will become matters of practical administration. The people can and will be furnished with a currency as safe as their own government. Money will cease to be the master and become the servant of humanity. Democracy will rise superior to the money power.”

[ect]

A government cannot issue currency without having a monetary policy.

Another defining characteristic of the 19th century USA, in addition to stable prices, was small government. Look at chart 1 (click the chart to enlarge):

http://www.econlib.org/library/Enc1/GovernmentSpending.html

Today's government is larger by an order of magnitude. Seems a tad excessive to me.

Regarding monetary standards, below is an analysis from Bob Prechter, who has been generally bearish on gold prices:

http://www.financialsensearchive.com/Experts/ewave/2009/0612.html

Sorry, it gets a little "spammy" toward the end. But here's a quote:

"The only sound monetary system is a voluntary one. The free market always chooses the best possible form or forms of money. To date, the market's choice throughout the centuries, wherever a free market for money has existed, has been and remains precious metal and currency redeemable in precious metal."

[fixer-upper]

"And if 4% inflation doesn't produce full employment, they'll try 6%. Or 8. Just a matter of getting the dosage correct."


But for you it appears that 0% inflation is the only metric that matters.

I'll gladly take the nuanced policy of Yellin, Bernanke, Krugman et all when it comes to macroeconomic analysis, over the simplistic prescriptions of the gold fetishists.

For one thing they are better at predicting outcomes.

Such as when Greenspan denied the existence of a housing bubble?

You're obviously against gold, and that's fine, but when you start attacking people who don't share your entire viewpoint, you come off as a trolling fiat shill.

[milesdividendmd]

Actually you're wrong. (Again)

I'm not against gold at all.

Though I own no gold in my portfolio, I am on the record as saying that adding a small percentage of gold to your portfolio is a very reasonable choice due to its diversification benefits.

I do think reverting to the gold standard is a terrible idea.

I am just completely unimpressed by the predictive accuracy of the gold standard anti-inflation crowd.

Their model is so poor at prediction, that it strikes me that they are the monetary equivalent to climate deniers.

But at least climate deniers ignore evidence in order to enrich themselves.

Gold bugs seem to believe in a magical economic world simply because it conforms to their own paranoid political psychology.

I am also no fan of Greenspan at all. (Wrong again) His blind faith in supply side/free market capitalism was a major factor in the Feds failure to regulate  the derivative market that led to the financial collapse.

Edit: And looking back at your posts it seems that ad hominum attack is your  personal calling card. (Which I don't really mind,).  It just makes your labeling of me as a "troll," quite humerous.

Perhaps you should google the term "projection."

[fixer-upper]

Actually you're wrong. (Again)

I'm not against gold at all.

Though I own no gold in my portfolio, I am on the record as saying that adding a small percentage of gold to your portfolio is a very reasonable choice due to its diversification benefits.

I do think reverting to the gold standard is a terrible idea.

I am just completely unimpressed by the predictive accuracy of the gold standard anti-inflation crowd.

Their model is so poor at prediction, that it strikes me that they are the monetary equivalent to climate deniers.

But at least climate deniers ignore evidence in order to enrich themselves.

Gold bugs seem to believe in a magical economic world simply because it conforms to their own paranoid political psychology.

I am also no fan of Greenspan at all. (Wrong again) His blind faith in supply side/free market capitalism was a major factor in the Feds failure to regulate  the derivative market that led to the financial collapse.

Edit: And looking back at your posts it seems that ad hominum attack is your  personal calling card. (Which I don't really mind,).  It just makes your labeling of me as a "troll," quite humerous.

Perhaps you should google the term "projection."

I imagine you're quite familiar with projection. 

I'm in favor of hard money if for no other reason than it makes wars hard to fight, rather than using them as a means to create inflation.  Whether the currency is backed by gold, land, or other property doesn't really matter.  Its simply a means of keeping governments accountable to the people, rather than assuming the role of masters of the people. 

Labeling me with a derogatory name for this viewpoint is an attack which would be unnecessary if you were interested in discussion rather than derision.  Hence, I consider you to be a fiat shill.

[TomTX]

Does this chart take dividends into account?

Almost certainly not. That would make gold look bad, and the only people making these charts are gold bugs.

And if you look at the 200 year chart, stocks again look really good, even with neglecting dividends. Stocks win by ~2 orders of magnitude.

http://bullmarketthinking.com/wp-content/uploads/2013/03/ratio-flat-chart2.jpg

[ect]

Almost certainly not. That would make gold look bad, and the only people making these charts are gold bugs.

The Dow/gold ratio doesn't tell the whole story, IMO. I've attached a long-term price chart of gold. Look at the flatness of the line for extended time periods. Gold was essentially fixed at $20 for about 150 years, then was bumped up to $35 in 1934, remaining there until Nixon killed the gold standard in 1971.

So it's difficult to draw accurate conclusions without free-market pricing. But being a form of money, I would think gold should perform roughly the same as a money-market fund or savings account. It's certainly not equivalent to stocks.

Other drawbacks of gold should be mentioned. Governments tend to hate gold because it competes with their fiat currencies. There's a perception that if I buy gold, I hate America. In 1934, FDR confiscated gold and then devalued the dollars, and was applauded for doing so. Today, gold investment gains are taxed at a punitive "collectible" rate.

My "gold bug" investment preference is mining company shares, but long-term comparisons to the broad market are problematic. The XAU (Philadelphia Gold & Silver Sector Index) dates back to about 1984. The 30-year performance has been horrific -- basically flat (not including dividends, which probably aren't very much of a factor).

You may conclude from the data that miners are bad investments. I would tend to conclude that they're bargain-priced.

[DecD]

In response to the original post:

My uncle thinks society is going to collapse into civil war and the only people to come though will be folks who have a physical stash of precious metals.  In light of this belief, he's started sending my kids silver and gold coins very month.  We send nice thank you notes, the kids marvel at the shiny coins, and then we put them away.  We will hold on to them for the kids until they're older.  So I guess my kids are invested in precious metals, in some small way.

[milesdividendmd]

I'm in favor of hard money if for no other reason than it makes wars hard to fight, rather than using them as a means to create inflation.  Whether the currency is backed by gold, land, or other property doesn't really matter.  Its simply a means of keeping governments accountable to the people, rather than assuming the role of masters of the people. 

Nice theory. Sadly it does not jibe with reality. If there is any causation here it appears abandoning the gold standard has saved millions of lives.

http://thinkprogress.org/wp-content/uploads/2013/12/Pinker.jpg

I'm sensing a pattern here.....

Evidence is a tough thing. But by your logic, I guess I'm just a "fiat shill" for evidence.

[DarinC]

Remember, Buffett is the same guy that accumulated 37% of the world's known silver supplies between 1997 and 2006.  So he's not exactly against owning shiny metals.

That's true, but I think Silver has many more uses in industry than Gold.

[ect]

Remember, Buffett is the same guy that accumulated 37% of the world's known silver supplies between 1997 and 2006.  So he's not exactly against owning shiny metals.

That's true, but I think Silver has many more uses in industry than Gold.

I guess you could say silver is both industrial and precious, while gold is only precious. Silver tends to outperform gold during periods of economic strength, while gold seems to enjoy trouble. During much of the 2008 crisis, silver was almost as bad as stocks, while gold held its value.

Silver bulls point to the metal's importance in the manufacture of solar panels. I don't have a strong opinion about that, but I think the entire precious metals complex is unloved and underpriced.

[dragoncar]

In response to the original post:

My uncle thinks society is going to collapse into civil war and the only people to come though will be folks who have a physical stash of precious metals.  In light of this belief, he's started sending my kids silver and gold coins very month.  We send nice thank you notes, the kids marvel at the shiny coins, and then we put them away.  We will hold on to them for the kids until they're older.  So I guess my kids are invested in precious metals, in some small way.

In such situations, gold is helpful but I think guns will be more handy.  Maybe join a bullet of the month club?

[milesdividendmd]

Remember, Buffett is the same guy that accumulated 37% of the world's known silver supplies between 1997 and 2006.  So he's not exactly against owning shiny metals.

That's true, but I think Silver has many more uses in industry than Gold.

I guess you could say silver is both industrial and precious, while gold is only precious. Silver tends to outperform gold during periods of economic strength, while gold seems to enjoy trouble. During much of the 2008 crisis, silver was almost as bad as stocks, while gold held its value.

Silver bulls point to the metal's importance in the manufacture of solar panels. I don't have a strong opinion about that, but I think the entire precious metals complex is unloved and underpriced.

What method are you using for valuation of the precious metals complex?

[ect]

What method are you using for valuation of the precious metals complex?

I'll give you a few highlights.

To value the metals, I look at cost of production. Attached is a summary for 2013 showing all-in sustaining costs of around $1,100 per ounce, versus a current market price of $1,300. The cost acts as a long-term floor because an industry can't survive selling at a loss, and we know the miners have already been forced to cut back on exploration. Beyond that, I expect sharp losses of confidence in fiat money as governments continue trying to print their way to prosperity. As you've seen in this thread, I stand nearly alone in my opinion, so it's certainly not priced into the market.

Miners depend on metal prices, therefore if the paragraph above is wrong, then everything else will be wrong, but miners are cheap by almost any historical comparison within the industry. Miners are near all-time lows in relation to metal prices. Miners are trading near book value (see chart attached), with reasonable balance sheets and other supporting metrics.

Finally, sentiment is abysmal. Gold is completely disrespected. It's the investment choice of lunatics and people who enjoy hearing the phrase, "What are you, an idiot?"

[milesdividendmd]

Interesting. I hope you do well. Though not necessarily for the reasons built into your model!

[TomTX]

Silver bulls point to the metal's importance in the manufacture of solar panels. I don't have a strong opinion about that, but I think the entire precious metals complex is unloved and underpriced.

The solar guys are pushing hard to move from silver to copper. The solar producer that was just bought by Solar City (Elon Musk's OTHER other company) - has the technology to produce high-efficiency panels with copper instead of silver and at a reasonable price. Musk intends to cut panel costs in half.

They're supposed to be close to breaking ground on a brand new, big solar panel production facility in New York soon. Using copper, not silver.

[ect]

Interesting. I hope you do well. Though not necessarily for the reasons built into your model!

Thanks.

If it gets really crazy, nobody wins. I especially fear hyperinflation because I've always had trouble pushing a wheelbarrow in a straight line :(

[fixer-upper]

In response to the original post:

My uncle thinks society is going to collapse into civil war and the only people to come though will be folks who have a physical stash of precious metals.  In light of this belief, he's started sending my kids silver and gold coins very month.  We send nice thank you notes, the kids marvel at the shiny coins, and then we put them away.  We will hold on to them for the kids until they're older.  So I guess my kids are invested in precious metals, in some small way.

In such situations, gold is helpful but I think guns will be more handy.  Maybe join a bullet of the month club?

PMs wouldn't be entirely helpful during a crisis, at least not as helpful as crates of booze or cigarettes.  Gold's primary strength lies in the insurance aspect of preserving wealth through a crisis.  Other people go the collectible route, buying cars, art, etc.  Its a relatively safe bet that the Mona Lisa will always have value, as will gold.  Whether the dollar will still have value twenty years down the road is anyone's guess.  That insurance comes at the cost of lower returns, but it has value, nonetheless. 

Since people here tend to be focused on stocks, ill pose a question:

Would it be wise to buy shares in a manufacturer which needed to buy back most of its product to maintain the appearance of strong demand?  If not, why are people so comfortable with keeping their wealth tied to the future of the Fed?

[waltworks]

If I own stocks, their value is denominated in dollars but not dependent on dollars - the widgets/doodads/bobbleheads/whatever that they make, the workers they employ, and their land/factories/etc are the value. So it doesn't matter much to me if the bobbleheads cost $1 or $10.

Full on hyperinflation would f everything up good. No question about that. Normal inflation, though, is laughably easy to hedge against by just owning ANYTHING other than piles of greenbacks in your mattress.

-W

[Mr Mark]

Certainly in the zombie appocolypse scenario i would think a few dozen cases of Jonny Walker Black Label, tobacco,  seeds, ammo, antibiotics and antifungals, ... all would be better to have than gold coin.

[milesdividendmd]

Certainly in the zombie appocolypse scenario i would think a few dozen cases of Jonny Walker Black Label, tobacco,  seeds, ammo, antibiotics and antifungals, ... all would be better to have than gold coin.

+1

Though I would add lidocaine and some non absorbable suture which I can procure at the nice low price of free.

[AdrianM]

JohnHenry

Reading your proposition, I understand your position to be.
Inflation = Good
Deflation = Bad

The whole point of inflation is for the purchasing power of money to go down.
If the purchasing power of money goes up then there is no benefit to the government.

If you take the time to educate yourself on the subject of inflation and its real world uses, you may want to rethink your statements.
http://danielamerman.com/atwo.htm
For anyone else the above link is to a free short course on how to "Turn Inflation Into Wealth"

[ect]

For anyone else the above link is to a free short course on how to "Turn Inflation Into Wealth"

Not impressed. I signed up and received the first free installment. I also looked through some of his articles posted at Financial Sense dot com.

I don't see anything obviously wrong with his analysis, but the answers aren't going to come free. The free content is designed to sell his DVD courses, which start at $349.

[AdrianM]

For anyone else the above link is to a free short course on how to "Turn Inflation Into Wealth"

Not impressed. I signed up and received the first free installment. I also looked through some of his articles posted at Financial Sense dot com.

I don't see anything obviously wrong with his analysis, but the answers aren't going to come free. The free content is designed to sell his DVD courses, which start at $349.

Chuckles. This comment almost boarders on Complainypants.

Mate $349 is for his the complete package.
Why not just start with a book.
http://mortgagesecretpower.com/bookpurchase.htm#mspprint only $19.95 for the ebook.

Better still try and find it at your local library.

[ect]

Chuckles. This comment almost boarders on Complainypants.

My apologies. I'll wait patiently for the testimonials from forum members who reversed their economic philosophies as a result of your recommendations.

[DecD]

In response to the original post:

My uncle thinks society is going to collapse into civil war and the only people to come though will be folks who have a physical stash of precious metals.  In light of this belief, he's started sending my kids silver and gold coins very month.  We send nice thank you notes, the kids marvel at the shiny coins, and then we put them away.  We will hold on to them for the kids until they're older.  So I guess my kids are invested in precious metals, in some small way.

In such situations, gold is helpful but I think guns will be more handy.  Maybe join a bullet of the month club?

A fenced, defensible, self-sufficient compound miles from civilization would probably also be helpful in that sort of scenario.  Shame we live in a large city.....

[Loud Noises]

Chuckles. This comment almost boarders on Complainypants.

My apologies. I'll wait patiently for the testimonials from forum members who reversed their economic philosophies as a result of your recommendations.

I'll chime in here and say that I've read a great deal of that authors material.  I find it both original and very thought provoking.  His model certainly does a good job of explaining what led my parents' generation to relatively easy wealth.  And I've never paid for any content; I'm actually shocked at how much he offers for free... even occasional email blasts with new info and analysis.  I'm about as little a fan of buying "DVD courses" as you'll ever find.

To summarize:
Legit
Free content
Thought provoking and accurate

[johnhenry]

JohnHenry

Reading your proposition, I understand your position to be.
Inflation = Good
Deflation = Bad

  Sorry you interpreted so poorly.  Maybe that's an interpretation you are projecting from your position which seems to be:

No government = good
government = bad

 
  To clarify:
  Small amount of inflation = just enough money to go around, plus a tiny bit extra.  No great concern for those who have money and are willing to invest it in productive activities.  Slightly better for debtors vs. savers as it does slowly erode buying power.  Discourages hoarding money rather than employing it usefully.

  Deflation = not enough money to go around.  Something impossible to avoid when using hard currency.  See a history of the United States under the gold standard to see the real consequences.  Yes they are real and detrimental to those with money and without.

The whole point of inflation is for the purchasing power of money to go down.
If the purchasing power of money goes up then there is no benefit to the government.

  Your statement reflects your failure to comprehend that the government can print as much money as it needs.  If money is something government creates rather than borrows, it's purchasing power is already unlimited.

If you take the time to educate yourself on the subject of inflation and its real world uses, you may want to rethink your statements.
http://danielamerman.com/atwo.htm
For anyone else the above link is to a free short course on how to "Turn Inflation Into Wealth"

I'll admit I clicked on the link.  Please tell me it's a joke. 

If you can read a free short course on how to "Turn Inflation Into Wealth" then why are you so worried about inflation?  :)

[grantmeaname]

If you take the time to educate yourself on the subject of inflation and its real world uses, you may want to rethink your statements.

Reading your proposition I take your position to be
I am so right that anyone who disagrees with me is self-evidently uninformed or stupid, and disagreement with my opinion can only come from a place of ignorance.

[pom]

Just read the first sentence of his first logic flaw:

"The collective best financial minds in the country assured us that while there would be short term fluctuations, if we did what was recommended and we followed a disciplined strategy over the long-term, then everything would end up working out with our retirement investments. Except that it didn't work out that way. "

Except that it did work out that way, for me and anyone that I know that "followed a disciplined strategy over the long-term". Real return over the 18 years that I have invested is about 5.5% which is not a get-rich-quick level but it is perfectly adequate.

That is when I stopped reading.