Monday, January 09, 2006

On Gold...

Many friends and acquaintances have been asking my opinion on gold. In an unusual bout of of self-congratulation for a usually self-deprecating observer, I am obliged to tell you that I have had the direction of it's price right from $330 to present. And my reasoning as to the move has also proved prescient: disillusionment and concern over "paper" resulting from unprecedented fiscal and monetary spinelessness, primarily in Washington, coupled with buoyant demand from increasingly prosperous middle classes in India, China and elsewhere. Where does it go from here? More of the same, I think, probably leading to blow-off sometime in '06 coincidental to the markets testing the word of Mr Bernanke by pressing the dollar and watching for his response, before the ripples of lower housing demand and prices makes their impact felt through the macroeconomy.

But what do I "think" of gold in the philosophical sense? My opinion coincides with that of one Robert Triffin, who was JK Keynes' American counterpart in chiseling out the post WWII monetary system that became known as "Bretton Woods". Triffin, a steady, sober and articulate man would have been horrified at the state of what he built. He would decry Japanese and Asian neo-mercantilism and scowl upon the large trade and current account deficits of the USA. He would disapprove of the leverage encouraged to permeate the USA economy and I reckon he would deplore the systematic debasement of the world's primary unit of exchange. There is little doubt he would recommend positive pre-emptive action to prevent these occurances, such as higher income and/or energy taxes, lower fiscal & household spending, or, in the absence of effective fiscal measures, substantially higher interest rates to cool the jets of imbalances that might threaten the entire system. He would believe it incumbent upon authorities to cooperatively steer our economies through a good, but admittedly imperfect system.

And what did he think of Gold? To paraphrase:

There are few human follies that are more amusing or more scandalously wasteful than the one in which man scours the world to discover gold, subsequently digging deep and moving enormous mountains of earth at great expense to remove it from the ground and refine it, then, move it to the other side of the planet (also at great expense), only to dig another great enormous hole, and bury it once again deep in the ground.


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