Sunday, May 30, 2010


Summer has arrived and there is no shortage of gold bugs to usher in the hot season.

They seem to be everywhere. In popular media, in strip malls, on the street corners holding placards, and everywhere in between.

The arguments proffered by the gold bugs are simple:

1. It will protect you from inflation. It won't. Witness the Price Revolution of 1600 in response an influx of precious metals from the New World. Owning gold does not mean one is immune to inflationary pressures.

2. It serves as a store of value. True, however, there are storage costs for physical gold that dilute value over time and provide an EXPROPRIATION/THEFT risk.

3. Governments cannot be trusted. True. but this is not a reason to own gold. Refer again to the "Price Revolution" of 1600 as well as the panics of 1820, 1890, and 1910. If the End Of Timer scenarios do play out, does anyone want to hold a large supply of a relatively heavy metal that requires considerable energy to store and transport?

4. It is a safe asset. It is not, by a long shot. Gold prices are volatile, and the current FAD will subside soon enough. Milton Friedman once quipped "Nothing cures high prices like high prices". In other words, supply is popping up everywhere and the purveyors of the supply wish to keep the illusion of massive scarcity and governmental collapse at the forefront of the popular Zeitgeist for as long as it takes to clear their inventory. Is a "safe" asset one that is highly dependant on extraction activities in sub-Saharan Africa???

5. It has historical, preternatural value. True. So what? So did Salt and cow teeth at one time or another in history. Tying a sovereign currency to a commodity that is not WHOLLY dependant on production factors WITHIN its own borders completely obliterates the point of having a sovereign currency in the first place. So let us go back to a gold standard that is highly sensitive to gold production in countries thousands of miles away.

As an aside, the number one producer of gold is...China. If the United States outsources its currency advantage, I will look at emigration options, because the greatest non violent foreign policy victory in the history of mankind occurred when the U.S. went off the gold standard in 1971, and the second the U.S. relinquishes this precious advantage will harbor great danger for coming generations. That is the real danger as opposed to the hogwash regarding balanced budgets and deficit terrorists who wish to whip the country into a frenzy based on economic analysis wholly inapplicable to non-convertible sovereign issuers currency regimes.

1 comment:

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