I find it pretty hard to argue with the Sage on this one. Here is what he actually said, in a Fortune magazine article (February 27, 2012 issue) based on his shareholder letter:

Today, the world's gold stock is about 170,000 metric tons. … At $1,750 per ounce … its value would be about $9.6 trillion.

…Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money.

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops–and will continue to produce that bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything.

Stefan Jovanovich writes: 

No one suggests that gold is somehow a magically superior investment; as Money it is not an investment at all, simply the means by which people can save wealth with the assurance that it will not be easily confiscated or corrupted by the government. Mr. Puffy has lived an indulged and indulgent life; since early childhood he has had the security of knowing that nobody would ever mess with him. Throughout human history many, many people have known that they would be the opposite of a Congressman's son. (Cue "Fortunate Son"). They have even been paranoid enough to think it wise to hold some of their wealth in a portable form. Calling the insurance company in order to collect on your policy might not be possible. As even the Oregano knows, there is always the regulatory risk that you may be on someone's shit list. At current prices I can fit the gold coinage equivalent of the average American's lifetime savings ($95K) in a tiny case; it will weigh less than an ultralite laptop. It is just such similarly-sized hoards of the stuff "incapable of producing anything" that allowed the Hugeunots, Moravians, Jews, Anabaptists, free thinkers and so many, many others to flee and save themselves and their families.

Comparing the world's Coin with the valuations of some of the things it could buy is a sensible exercise. Sometimes Money is overpriced, and sometimes it is not. That is for the market to decide. But using crude sums is a rhetorical trick that the Oregano really has to give up. It contradicts everything he has done in his own business practice. As he well knows, anyone who acquired even 10% of "all U.S. cropland" - let alone all of it and 16 Exxon Mobils - would find himself subject to envy regulation by the FDA and the entire Congress; the farmland would still be there a century from now - asteroid strikes being excluded as acts of God - but the returns on investment would not be. That is as certain as the fact that the people who regularly visit the White House will always want to assure the rest of us that the government's word is all we need.

The notion that the government should not "regulate" individuals' money savings is as radical these days as the idea that people have innate rights of liberty not subject to the will of the King was 250 years ago. I don't expect to win this argument in my lifetime; but things do change - sometimes even for the better.

George Parkanyi writes: 

Stefan, I fully understand why people still invest in gold. They/we believe that in the future is can be exchanged first for whatever currency prevails, and then with that currency buy goods, hopefully with roughly equivalent, or perhaps greater purchasing power. My point is that when you think about it - gold itself has limited intrinsic economic value. It does not contribute all that much to actual wealth-creating productivity. It's mainly just used as a proxy for wealth - only because enough people still agree that it is. It's not a commodity that people use day-to-day except for decorative purposes (jewelry and art) and in electronics. It's not something we need with which to sustain ourselves. That to me is its vulnerability. Yes it's tangible, but it doesn't really do anything.

I find it fascinating that in some African rural areas people use transferable cell-phone minutes as currency. That's the kind of digital-age utility I'm talking about. I think that abuses and corruption aside (you find that everywhere anyway) - electronic money is just so much more convenient, and modern economies are now totally structured around that. Modern economies use their productivity as the "collateral" behind their currencies. That actually makes sense as long as you put enough governance around it so that people are willing to trust the currency, and computer and network technology facilitates trade like never before, hugely boosting productivity. Apart from straight barter with things like refrigerators, I can't think of anything more cumbersome to use as a medium of exchange than gold. It's heavy, not easily divisible. I can't even sell my gold coin (received as a gift) to a bank without the original purchase paperwork - otherwise there's an assay charge that goes along with it. What a pain in the ass(ay). And it may not help you all that much in a Mad-Max world either - if food, water, clothing, tools, and guns are at a premium, who wants to be lugging around a heavy gold bar?

I do agree that its not going away any time soon. The emperor may have no clothes, but everyone has universally agreed to pretend that he does.

Stefan Jovanovich replies: 

The Founders and their British forebears like Isaac Newton were committed to milled coinage because, once one accepted the assay of the issuer - i.e. the Royal or U.S. Mint - the coins themselves could be valued simply by weight. Even sweating the coins (shaking them in a bag and then collecting the dust generated by the friction) and minor clipping would not affect their value because that was determined by the weight of the coins themselves, not the "face value". That is the point of the gold standard clause in the Constitution - Congress sets the weight and measure for a coin - i.e. so many ounces at the standard assay. That allowed a $20 gold piece that was worn to be discounted accordingly; the "gold clause" in a contract was a commitment to pay be weight and measure, not by face value alone. (And, yes, every store had a scale; one of the first demands of merchants for commercial regulation was to have scales themselves certified by state and county inspectors.) One of the many reasons Grant's Resumption and Legal Tender Bills (making greenbacks redeemable; setting gold as the only monetary standard for the first time in U.S. history) were so successful is that U.S. Notes - the promises of the Treasury to pay gold of a specified weight and measure - became more reliable than coin itself. The paper money did not itself have to be weighed and the printing and engraving and paper were sufficiently subtle that counterfeiting was too expensive to be profitable!






Speak your mind

2 Comments so far

  1. Ronald Weber on March 2, 2012 5:33 pm

    Or maybe it’s just a crowded trade that might soon loose the strength of its initial correlation characteristics. I remember when I first mentioned the idea of gold investments in the early 2000s, it felt very lonely, the mere thought of it was often met with smiles and many reasons why it is a poor idea. Ten year later, the exact opposite conviction has taken hold, and one is an heretic just by daring questioning the magic metal’s properties! Since 2002, investors have been piling on some expectations that gold is supposed to protect against (or benefit from), so I also wonder if theses expectations are not set too high, and gold is maybe just the reflection of a mere bearishness bubble ? But that’s the tricky point about bubbles, they can go a long way to prove all the rational experts wrong (including the Sage) and crush the last of the sceptics…time will tell…

  2. Cole Walton on March 8, 2012 3:26 pm

    Gold must be understood in a historical context. It is not an investment, but a currency that has existed since the beginning of modern humanity. That is why any comparison with a yield or capital gain producing investment is wrong. It is the equivalent of asking someone if they would rather own all the U.S. crop land and 11 Exxon Mobiles or the equivalent value in any worldwide currency. I would guess most people would chose the money for many reasons. Gold is useful as a currency because there is a limited amount of it. What gives the dollar bills in your wallet their value? The full faith and backing of the U.S. government? Why would you want to put all your wealth/faith in the hands of a very few who have the power to create more dollars out of thin air? The founders of this nation realized that the power to create money should not be vested in the hands of any group of individual. Hence, why they backed the currency with hard assets like gold and silver. During the early 1900’s J.P. Morgan and a group of powerful individuals were able to trick the general populace into establishing the Federal Reserve (which is privately owned) and were able to convince the general populace that a gold standard was not prudent and that a central bank could smooth out the business cycle by giving it the ability to grow or contract the money supply. The problem we now face is that Greenspan and Bernanke are one trick ponies. Whenever we face any market downturn they print more money or make it more readily available via reducing rates or fractional reserve requirements, thereby flooding markets with easy money. When there is more of anything, it becomes less valuable. Eventually, the bond markets will take away the printing press from the central banks of the world and the gig will be up. Power corrupts and absolute power corrupts absolutely. No government should ever be allowed to print money out of thin air. It is a sly way for the rich (financial elite) and those with access to inflation hedges to rob and keep down the poor. Wages do not adjust at the same rate as pices. Look at the price of a coke over the past 100 years or the price of gas/oil or other commodities today. Eventually, people will wake up and say enough is enough. Inflation is strictly a monetary phenomenon and it does not have to occur. However, most people who are now alive don’t know any better and accept it as a fact of life. For me, I will hold a significant part of my portfolio in gold and silver because I understand what is going on. Why is it that so many people want to turn away from the truth and actually argue against what is happening right before thier very own eyes?


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