Friday, October 09, 2009

Mourning Rally

I am reasonably detached and dispassionate about most things financial, most notably in the investment strategies I've managed over the years. These have always been well-diversified, measured speculations that carefully consider risk vs. reward and viewed in a portfolio context. As such, I do my utmost not to invest myself emotionally in all aspects. So it is most curious that I should find myself experiencing very visceral negative reactions to the upward movements in the gold price. For I NEVER felt this way about any vaulting momo stocks over the last twenty years. This remains as true today whether it be yet another uptick in Green Mountain Coffee (GMCR) which doesn't make me lose sleep, despite their contract to supply McDonalds with designer coffee. Even the Sherman's March in Oil to $150, which carried out each and every short (both trade and spec) didn't ignite the same uncomfortable negative emotions combusted by seeming relentless gold buoyancy and the self-congratulatory chortling of goldbugs. Puzzled, I must ask myself the question: "why is this so" ??!?

On a simple level, and perhaps most obviously, it could well be that I am not long. And while academics, psychologists, and behavioural economists have not fully-tackled the biochemistry of watching a feeding frenzy from outside the pack, there is much scope for further examination here in respect of emotional reactions. That said, I have happily survived twenty years where in my universe of tens of thousands of equities, there are always many that are galloping upwards outright, or relatively outperforming in a significant manner, and which I am not long, yet, I couldn't give a toss. My emotional sine-wave measuring visceral my reaction remains flat-lined Nor am I otherwise irritably-moved by a boiling coffee futures price, a bubbling cocoa time-series of spot prices, or any other commodity for that matter - none of which causes my stomach to turn.

Perhaps it is the messianic overconfidence that Gold's flock exude - approaching if not surpassing that of a missionary's zeal, not content to understand alleged The Truth within, but driven by a seemingly possessed enthusiastic (surely insecure?!? -ed.) exuberance that seemingly demands a validation of their views by attempting to convert the non-believers. Here, too, I will readily admit to being irked by the hyperbole and their spewers, but not in response to the zeal itself, but for my fear for them as an introspective frequent self-assessor. But neither Hare Krishna's, Jehovah's Witnesses, nor fire-breathing Born-Again-And-Again Fifth Pentecostal of the Latter Day Adventist Saints cause any visceral reaction in me whatsoever, despite the potential stakes being much much much higher (arguably the highest, though perhaps not on a probability-adjusted basis). I actually enjoy the Sunday-morning house-calls from the divinely-inspired pamphleteering sorts, be they Mormons or Seventh-Day Adventists or devotees of the Flying Spaghetti Monster, and am most polite when highlighting logical paradoxes, even going so far as to offer tea and biscuits.

It could also be that I fear they are, in the asset-allocation game, singularly, and single-mindedly, right. But I really don't think this is the case, since in the world of "assets" - be they scarce or otherwise, as I have written before, there are plenty of other assets, fine substitutes and alternatives for whatever cards are dealt - many of which will prove to be superior investments under weather both fair and foul across multiple time-frames. Moreover, judging by those ululating its virtues the loudest, they (at least if judged by the average blog comment deposited around the blogosphere) are unlikely en-masse to be "the winners" in the next chapter of capitalism's evolution. I will admit stranger things have happened, but it's just not highly probable that the contrarians win much further when their view reflected in prices is no longer contrarian.

Rather, I think that in my search for meaning, the rallying Gold price signifies more monumental failures at multiple levels for society, in politics, for nations, for our individual and collective ability to measure our wants and desires with our means. So despite my skeptical exoskeleton about most things (financial innovation perhaps first and foremost), the aforementioned bothers me intensely, for I am, at heart, both an idealist, and a closet optimist about humanity, foolish as it may be, and perhaps as paradoxical as Cliff Asnsses' views on Healthcare. Sustained Gold rally lances this optimism, helps lay bare the falsity of the veneer of prosperity and the fragility of its lattice during these last two-and-a-half decades, revealing the financial pus inside. This is after-the-fact, market reactive stuff and comes as no surprise to a skeptic, but one must push this view from the minds eye to function day-to-day without self-inflicting wounds. And what be goldbugs culpability? They resemble anarchists: strongly motivated to be on the vanguard for a variety reasons, but ultimately selfish and probably mistaken for apocalyptic systemic implosion remains a tail event. In this view , gold remains "a trade", and not an end to itself. More irksome, a bet on Gold may be "right", but it - betting as it does upon the acceleration of pus manufacture, feels (to me) somehow uncivic-minded - a wasteful employment of intellectual energy that might be set upon making what is systemically and socially un-well, better. I do not hate them for this, but am, merely saddened that the sum of prior decisions taken (and not taken) have brought us here.

Logic would dictate that I too should be dispassionate, for the set-up and speculative break-out percolating has been clear and obvious as risk spreads have shrunk, John Paulson has bought a zillion ounces and introduced a Gold-denominated share class. And for whatever reason, the rear-window feedback loop effect is stronger in Gold than other investments making continued follow-through more likely. But my feelings are not logical, and in any event it's rally belies the still-elevated likelihood that we will wallow in a recessionary mire for some time which if not deflationary, shan't be inflationary; that the public sectors' apparent bloat is - contrary to the fear - not under the present circumstance, inflationary, hardly compensating for the the [continued] shriveling in the private sector, nor will it do much to multiply money or ignite velocity so long as the era of private stupid loans is well-and-truly passed. So when I see Gold rally, my visceral reaction is the result of my incredulous beliefs confronting contrary evidence, and the mourning for said failures (both real and imagined) that it represents. And I find it difficult to go out and play when mourning.

(* headline photo is from a set of Finbar O'Reilly's in Reuters, via Telegraph Blog)


RCJ said...

I tend to break my investments into two buckets, real investments;equities, debt, prfds etc and insurance. For me the two investments in my insurance bucket are oil and gold. I don't expect to earn any money on insurance but I buy it to protect against macro stupidity. For oil the macro stupidity tends to be focused on countries playing old games in the middle east but for gold I think I end up in a place similar to yours. For gold I would prefer for it to just sorta sit there and its recent rise makes me think that (1) something is amiss in global monetary behavior and (2)The fact that others are buying insurance makes me think ill of large hedge funds.

But enough of that, I will pull my chair up closer to the macro window and try to figure out what is going on.

Anonymous said...

An ounce of Gold throughout the centuries has always bought the proverbial nice suit. Its historical record to parallel and match increases in living standards, nominal GDP, debts of deadbeat princes, albeit with the periodic vicissitudes in price, is the source of its intrinsic value for the bugs. I wouldn't say the gradual gold price increase of the last few thousand years has represented a "monumental failure" at multiple levels of society because there has indeed been much progress in this time.

It's easy when staring at the screens all day to forget that fiat currencies backed by a promise to pay/tender/honor despite tremendous credit risk (through the broad sweep of time) are the historical anomaly, not the norm.

Robert said...

Humans don't deal well with fast paced change and for a certain section of society e.g. anyone remotely to do with the financial economy a rising gold price is a canary in a coal mine screeching that change, horrible brutal fast paced change is approaching. That same financial economy has despised gold for years because it's so damned inefficient, when you have money in the bank it gets lent out, your money is being put to productive use, when you buy a bond your lending it, get some stock and your receiving a dividend and helping to provide capital to a company that needs it. Even commodities are good, oil is fine, because you can burn it to power things, buy copper to make things, your money is being used efficiently. But Gold? Well that just sits there, it's pretty but purposeless, the people buying it are locking all that potentially productive money away in a metal coin and worse than that locking it in a vault, which you have to pay for! And then they're sitting there not even trading it, just sitting there holding it in the sure and certain belief that in the end what's in their vault will be worth alot more than every single other asset class.

I think your worried that the goldbugs might be right, something that you've never considered before and if they are, then it means a level of change coming that you don't want to contemplate.

It took Volker breaking the back of inflation to tame gold last time, the time before they had to confiscate it, make it illegal and devalue against it in order to claw back from the brink. So why is it different this time?

Patrick said...

Thats what keeps me coming back to the markets, you keep learning new things about yourself. Don´t worry, gold is in contango and this isn´t the big one. Holding physical gold and forgetting about it in some single or maybe low double digit allocation of your portfiolio is probably a good idea.

Maybe the reason you feel bothered by it is because gold has some alchemical resonance with our electromagnetic fields and the thought of not being able to aquire any at a reasonable price is frustrating. You ever see Holy Mountain?

Do you want gold?


I got short a buck below the all-time high, stopped out even and then got long on the first dip and let it ride, because I believe in gamma, not so much the gold futures. I´m a gamma-bug.

CH said...

Jumping in at the current gold heights seems to be a play for the end of the world. However if the fantasy is for the economy to continue to get worse and worse, raising the "value" of gold to the stars, wouldn't you be better off investing the capital into guns, bullets, food, liquor, and cigarettes. Much more useful and there will always be a market for those in anarchy.

On the other hand, if God forbid, Obama and the other world leaders manage to turn this puppy around, then gold is going into freefall.

Chris ( said...

As a wiser man that I once said, you can pretend that there's some intrinsic value to them over their base utility, but in the end they're called commodities for a reason...

Funny things happening in metals recently though - I presume you saw the action in the tin market?,28124,26154620-5017999,00.html

"Cassandra" said...

Thanks for the comments - external input is useful, though the question I pose remains a profoundly introspective one.

Chris - As for market games, the phrase "Boys with Toys" springs to mind. One finds few, if any women endeavoring so. Women spend their precious energy on entirely different intrigues.

Stevie b. said...

It's a long post and forgive me because i may not have given every nuance of it my full attention, but it seems to me that the game's changed and you weren't aboard, perhaps because your mind got in the way of allowing you to recognise the reality that under certain circumstances there has always been only one credible alternative to fiat currencies for the common man.

I've had a certain percentage of my assets in gold for over 35 years and never regretted it. I always hoped it would go to zero. I added to it for the first time last year. And probably like most others in a similar situation, i'm not crowing now, but I'm incredulous, and nervous about what it all means for my other assets.

The game has changed. It was ever thus. Are we capable of dealing with the new reality? That's the challenge now.

Anonymous said...

Firstly, venial nit: insert "of" after "variety" in sentence beginning "They resemble anarchists".

More importantly: love the posts immensely. Rushing to work, but do not stop writing, these are very much appreciated!


Anonymous said...

Perhaps you are bothered because lust for the barbaric relic is an unfortunate reminder that, beneath the civilized veneer, we really aren't all that far removed from the savannah, jungle, or whatever environment the most prolific variation of homo populus ultimately emerged from.

You said it yourself, this is The Big One. There is nothing written in stone that says humanity will progress, or even endure.

Another idea is that as one familiar with cycle theory, you know deep down what this profoundly unusual market development actually means. It means Martin Armstrong is going to be a lot wealthier than you previously thought...if he ever gets out of prison.

Speaking of whom, I have a question which you may be able to shed some light on. The Japanese bought a lot of derivative products to mask their losses from the market crash. These products presumably had long maturities so as to enable the buyer to hide their losses knowing that they would be long retired come redemption time. Not only are these products likely worthless (i.e. no principal to redeem), is it out of the question that they may even owe further debt on the thing? (I am making the rather large assumption that Japanese companies have not "cleaned house" over time.)

David Pearson said...


Nice piece.

I've fellow-traveled with gold bugs over the years, and their mo-mo sometime-friends, so I know a gold bull can certainly suffer from what the victorians euphemistically referred to as "bad company".

Nevertheless...there are extenuating circumstances here. First, this is not a new development. Gold is the only asset class that has been in a bull market since the Fed developed deflation phobia eight years ago. Eight years; the only asset class. Surely this is grounds for some degree of credibility. Second -- staying with technicals -- the gold price is anything but bubblelicious: it just completed its third eighteen month consolidation in eight years, it has broken out gingerly, and many other assets have outstripped its more recent gains. A bubble? Or simply the break of a psychological but otherwise meaningless barrier ($1000)?

Thirdly, gold doesn't go up in price. It is, in investment terms, immobile. Rather, the dollar falls, typically because of oversupply. A bubble in gold is merely a failure of confidence, as you point out. The difference between us is as a Latin, I can be optimistic and still think the government wants to debase the currency. Where I come from, its many more people than Glen Beck and Ron Paul types hold this view. Perfectly reasonable people hold it out of personal experience, historical perspective, and pretty solid analysis.

So I don't agree that the gold price is as apocalyptic as you might believe. It comes down to this: when the bill comes due, do we choose to pay in unemployment, or do we choose with money printing? Its a straightforward trade off. Having a reserve currency means you subject your working classes to the former. If the reserve currency issuer constantly chooses the latter, then, gradually or quickly, it loses that status. All gold is doing is reflecting that policy choice, not by a handful of government bureacrats and politicians, but by the POLITY. There is no constituency for a stable currency in most of the world right now. That is why this trend is ultimately a strong one. Its not a conspiracy; it is a societal imperative that we save ourselves from unpleasantness. So why would you wonder that the gold price reflects that?

"Cassandra" said...


As always I value your comments. ANd I cannot fault your logic or facts.

SOme additional thoughts: First, I never said Gold was a bubble. Second, it is not that I believe rallying gold (or even more-elevated inflation) is a sign of an apocalypse, but this belief is seemingly tethered to many goldbugs (though not necessarily gold bulls). And I do not ponder what rallying Gold reflects, but why repeated daily-double-digit movements elicit such a visceral reaction IN ME.

I suppose the lens through which I view finance is almost always a relative one. In equities, exaggerated outperformance of a stock can legitimately reflect a cure for cancer or similar game-changing discovery (GILD? SWN?), a winner-take-all [temporary] market innovation (AAPL?), or what might turn out to be, ex-ante, sub-optimal behaviour (WFMI, FSLR, BEBE, and countless). Price matters, and in the relative context, each and every upward tick, while in certain cases it may prove to be justified, makes a statement about almost every other potential investment. For the stock that triples may NOT be overvalued - everything else might merely be undervalued. Gold Fixed at 35/oz had deterministically absurd consequences for price when unleashed. The hangover and the markets misplaced optimism in humankind and ability to engineer only gain without pain resulted in Gold (and many other commodities) mis-reflecting long-term relative values. Today, at 4x trough prices, while other assets have similarly languished or been otherwise minimized, again one must the same questions: what is it worth relatively. Not just in comparison to a few close, liquid substitutes, Silver, or Oil or SP&500 units, but the whioole gamut from what it buys of a man's labour, what yields in entertainment, the abundance it places on the table, and as others have pointed out, the quantity of consumer goods - whether in over supply, market balance, or in undersupply, and in terms of forests, fields, mountains, sheepfolds, timeshares, or, yes, even Detroit sub-prime repossessions. The markets are big, and the potential assets are unimaginably vast, and span not just the terrestrial earth.

The Gold market is small by comparison. So in a world characterized by an electronic thundering herd, it will not take much of the visceral reaction that I feel, if shared, to have outsized and persistent impacts upon price. These are unprecedented times in many ways, with global markets, instant information, ease of money movement and participation, all which cuts both ways, to correctly transmit information to prices when they are undervalued as well as cause them to overshoot despite their overvaluation.

One must keep asking: what is the correct price, even if it is unknowable and and never exists. One must try to find it by intersecting the vectors of multiple relative valuations and comparisons. And if they be too high, then caveat emptor, and if too low, then happy days with assymetric risk/reward provided the leverage is not piggy, and one's constitution an iron one.

Your latin experience is valid, I consider it wisely. I by contrast am modern germanic in my orientation, so I prefer the slow socialized road to perdition, punctuated by reining-in along the way those things that would upset the long-run balance, rather than stoking the fire continually (in good times and bad) until it combusts uncontrollably. I viscerally fear uncontrolled fire as much as I do not want it, or lament the possibility, though practically, here and now, I am still [rightfully] asking the question whether the fire is well and truly out of control. My gut says it is not, the gold price says it might be, or at least it says that others are worried it is (and that the market is small), while most other assets and relative valuations (for the moment) remain sanguine. While I believe this is the big one (hitting the boundary of peak credit), I do not (yet) think this is the moment of systemic implosion.

Ni sen said...

Anon 5:01, in Tokyo you can buy a 'nice [tailored] suit' for half an oz of gold....
Gold @ $500/oz or $1 @ ¥50?
Faites vous joues!

Anonymous said...

When does introspection become navel gazing?

Anonymous said...

Perhaps gold is anti-social, but for some of us having too look at the daily farce we have that passes for a society is much more depressing. Maybe you haven't entirely given up on the current system, but a cold analysis of history yields dire possibilities I'm afraid. At first its depressing, but after awhile it simply becomes "the facts". You can either deal with "the facts" or stick you fingers in your ears and pretend they aren't there. For those that have passed to the stage of dealing with "the facts" gold is just another way for those of us that aren't running to free world to do what we can to protect our loved ones and ourselves. Being a sucker for the man by having your wealth confiscated isn't going to fix society.

Anonymous said...

Related to above, this is not a ringing endorsement of gold at these levels. Simply an explanation of why gold investing is not some "evil" as you seem to imply.

kristiina said...

So, gold is the new black this autumn season. It may make economy's body look horrible - skimpy at those places that would need mercy and baggy at places where a close fit would be more appropriate. But does the problem lie in gold being fashionable or in the economical body showing it's true contours? Is it appropriate to blame fashion (gold) when the model (economy) is the one that's ugly?

"Cassandra" said...

anonymous - while i am sympathetic with the feeling of being screwed at each turn, many common expressions of angry libertarianism that blame The State and recoil to Kaczynski self-sufficiency that ultimately imply some form of anarchy seems self-defeating. Rather than be the victim, why not try your hand at revolution and be the confiscator rather than the confiscatee? Just a thought, if lack of control were a particular bugaboo.

Kristiina - Oh dear, I hope you do not think I am blaming gold. Gold is of course only the messenger. But there are lots of instances of "incorrect numbers", mis-diagnosis, or correct diagnosis given to the wrong patient. While I have my doubts about the system, I am unconvinced that gold's present move is the harbinger of its demise, and if forced to chose lean more to David's classical inflation vs. unemployment+output gap choice.

Mencius Moldbug said...


If only all the goldbugs in the world could be sentenced to read this post! Alas, they won't. But mourning and apprehension are indeed the proper responses, regardless of whether you are or are not "long."

(Oddly enough, I have just been reading the turn-of-the-century letters of Henry Adams, whose spirit of aristocratic foreboding is Cassandra-esque indeed. Mr. Adams is also very down on the "gold-bugs" - quite a different crowd back then! Unfortunately he combines this with a spectacular bug up his butt about Jews - who appear, individually, or tribally, on almost every page of the Letters. A curious fellow, Henry Adams, but quite worth reading.)

The axes are indeed easily exchanged on the dollar-gold exchange rate, and it is at once seen that mourning is the proper emotion. There is no getting around it: who bets on gold bets against America. A dollar being, more or less, a share in the latter. Old Morgan would not approve.

But, you know, there is another way to look at it, which is that who bets against gold bets against History. America remains a great country. I will take her in almost any fight. When she goes up against History, though, the wise money is at best on the sidelines. America, great though she is, is way out of her weight class here.

Mencius Moldbug said...

There is a less poetic way to look at the matter, which is simply that we're watching a currency competition game here. This has nothing to do with investment or capitalism at all. The problem has no relationship to picking stocks or bonds, which is a second-order problem that only exists within a stable currency.

If currency A is perceived to be reasonably watertight and currency B is hemorrhaging like a stuck pig - North Korean counterfeiters, perhaps, are printing 20% of B's money supply every year - people will see that those who hold A appear to be experiencing a 20% annual return. They will sell B and buy A, causing B to depreciate and A to appreciate - supply and demand. As Osama put it, when people see a weak horse and a strong horse, they bet on the strong horse.

So there is no particular limit to the gold price, because the quantity of dollar savings that has not yet taken Osama's advice and moved into gold is astronomical compared to the size of the gold market. And it *can* move into gold, because $10000 gold or even $50000 gold will generate more gold - but not a lot more gold.

Of course, what can move in can move out. And just because it can move into gold, doesn't mean it can't move out of gold and into Honus Wagner baseball cards. Gold is a bubble - but so are all monetary systems.

What makes gold different from Honus Wagner is that (a) it is a Schelling point, being well-known as a natural currency, and (b) has a stable endpoint, in which it is fully remonetized. It is very, very far from fully remonetized at present.

It is perfectly possible to imagine an endgame in which normal people, who in the '80s and '90s learned to store their savings in stocks, learn to store their savings in gold. It is even possible that our legal and financial system is healthy enough to create new gold-denominated financial markets, although it is also possible that it is not.

So, for instance, one can apparently walk into any bank in China and buy a bar of gold. At present, this is somewhat nascent and still competing, as an alternative currency for the private savings of the Middle Kingdom, with the horrific Chinese stock market and the even more horrific Chinese real estate market. I suspect that even Henry Adams, given the choice between a yuan account yielding 2%, Chinese stocks, Chinese apartments, and a bar of gold, would pick the last.

The wild card in this game is the behavior of governments, which certainly have the power to make a stable endgame non-stable. I discount entirely the theory that they will actually fix the problem, but they certainly have the power to disrupt the gold market from the above libertarian abstractions.

However, the behavior of governments in this crisis has been reactive to a T and not suggestive of any grand conspiracy or ideology, whether directed by the Fed, the Jews, the Communists, or Fu Manchu. My suspicion is that all the people who knew something about keeping the gold price down had retired from Treasury by about 1995, their replacements having been so thoroughly convinced by the party line that gold is just a commodity that they believed it.

Now, there is some sadness on my part, because when I started saying all this in 2006 it appeared to be the ravings of a loon. Whereas now, one can find it in the Times so easily that I'm afraid I am boring people.

Mitch said...

My aversion is primarily environmental...the thought of the sulfuric acid

" According to the Worldwatch Institute, all mineral mining in Canada generates 650 million tons of waste per year. Miller estimates that each year gold milling alone in the United States generates about 1 billion tons each of waste rock and tailings (the finely ground remains of milled ore), numbers that have actually gone down in recent years, due to the drop in gold prices and the scarcity of high-grade ore.

The gold nuggets and rich veins of gold of a hundred years ago are tapped out, and today's miners work deposits containing as little as 0.015 ounce of gold per ton of rock, in the process excavating as much as 4 billion tons of rock during the course of a mine's often short working life, Miller says. These massive operations bring with them new potentials for environmental damage including accelerated acidic runoff, accidental waste releases, and leachate that can infiltrate waterways and aquifers."

I honestly believe that it is past the time that we can survive without massive cooperation.

Let's get on it!

Anonymous said...

While I am not long gold - my second life avatar is majorly long. I asked him why, but he was busy flying around (he has wings) while trying to have sex with this green thing.
Anyway his non responsiveness made me realize I was talking to myself.

I believe he is long gold because it gives him an economic link to the real life. After all, gold chains would just way him down when he's trying to fly and I doubt they would impress that green thing anyway.

kristiina said...

Dear Cassandra, I'm still trying to grasp the exact spot that makes you turn away in sadness.

Gold is, besides being a commodity, also a symbol for incorruptible value. For those who, for whatever reason, have not thought through what incorruptible means and what value means, gold is not just a symbol, it is the substance that has incorruptible value. And it seems that the goldbug attitude is something like this: finally we are coming back to valuing the incorruptibly valuable. But, as mr(?) Moldbug so wisely says, gold as money is no less fiat than anything else being used as currency.

So, there may be an element of gut reaction of the ignorant in the popularity of gold. Is it this ignorance that saddens you, dear Cassandra? The conviction of (some) gold-buyers that they are buying something that has incorruptible value? In this they are undoubtedly different from those who participated in the oil-price-game. So, in some way, as a pawn in the game of economy, gold is tainted, because of the way it blends with the concept of value.

To me those who buy gold as a safe store of value seem certainly mistaken, but still intrinsically good: they know there is something that has incorruptible value, they just are, at the moment, mistaken about what it is. But i must also admit that the morally tainted jubilation of gold bugs looks foolish. Gold getting more expensive does not mean a return to more real values and escaping the morally hazardous game of markets.

Gold is such an interesting thing: it sits on the border of material and philosophical, an inhabitant of both the world of ideas and the material world. The inspiration of alchemists.

(This writen while looking at gold rain outside: after a cold night the leaves are falling in still air, the frost on the ground shining like diamonds.)

Shairon the Parliamentarian said...

"(This writen while looking at gold rain outside: after a cold night the leaves are falling in still air, the frost on the ground shining like diamonds.)"

This whole gold thing is making me so sad! Kristiiina is on to something.

Maybe... Maybe instead of gold, we should invest in a substitute. Gold and Diamonds are too expensive....sooo If we invest in rain and frost.. that's right rain and frost. We can sell them to poetic types AS gold and diamonds. Sure you say, but aren't those commodities easier to find than poetic buyers, Shairon? Well yes they are, but think of the profit margin here.

Word of advice.... Spread Out!
Let's not all work the same University English Lit Departments or we'll collapse the market.

Anonymous said...

I suggest avoiding gold as an investment, as it represents a challenge to the established order and has a history of confiscation by governments. After all, if gold investors are "anarchists" and are "selfish", and have "culpability," then surely their ill-gotten gains should be taken from them, especially when others who trusted the system are suffering.

No, gold is not the way to go if you distrust the politicians and the ruling elites.

Instead, I suggest palladium. It's off the radar screens of most gold-haters, such as Cassie.

Anonymous said...

You are feeling fear, questioning your exposure. Other people are moving to hard assets and you are thinking that you missed something or they know something you don't. Regardless of what you believe about gold, your 20 years of financial experience just gave you a subliminal kick in the butt.

"Cassandra" said...


I cannot not argue with you because you're arguments will inevitably prove themselves annoyingly right. But one question: when you say "fully remonetized" do you mean, what would the price of Gold be if EVERYONE attempted to place their savings in nifty little Union Banque de Suisse Bullionettes, or do mean the price id all paper money were backed by some greater or lesser claim on said Bullionettes? And how is the small one?? Has she hacked your passwords yet?

Kristiina - My sadness primarily is that Gold is (as economic oil goes) a rather barbaric relic (not a unique view) and is (or rather could or should be) unnecessary in the admittedly idealistic modernity I wish for, but insofar as our delegated representatives, The Monetary Custodians along with their minions of credit pixies and the insatiable public have repeatedly failed in their respective fiduciary duties - be it consume in line with what one might sustainably produce; to spend more or less within one's sustainable means, be one a State or a Citizen, or as individuals to even attempt to wrestle against our most base of hedonistic desires in favor of The Future, or even at least in pursuit of something that equates or approximates a wise tradeoff between immediate gratification and some greater good at some point longer than the present nanosecond. Rallying Gold, to me, merely highlights these failures - and I think this is the correct word.

But that is not all. As you point out, and in particular as Shairon, despite her cheekiness, (and poor grammar) hits the proverbial nail squarely with head of the hammer: Everyone cannot (nor even the many) possibly save in Gold and have it result in paradoxically anything other than an investment travesty. I do not claim to know the where that may be, but clearly having an idea of relative valuation is of the utmost importance. An ounce of Gold that buys two good suits or three ingots of Molybdenum may be 50% overvalued and so forth. Everything has a relative price - whether that price is expressed in dollars, bushels, barrels, lacks, board feet, hectares, horsepower, KwH, etc., and Goldbugs, it seems to me, as singular fundamental zealots, seemingly miss this completely. Gold was undervalued at $300 (at least from mid-90s onwards), might be fair relative value at $1000 (with continued economic growth and untethered credit creation) but even with these conditions might at $3000 may be wildly overvalued on such relative scales.

Anonymous (last) - The topic does seem top expose some raw nerves. I do not hate Gold. Gold has done nothing to me to elicit such hatred - something I reserve for pernicious demagoguery. Rather, if one distrusts politicians and rulings elites, I would encourage one to invest as wisely as possible which (to me) means doing one's best to understand relatives values so that one is not blindsided by volatility stale longs at overval;ued levels, with an objective perhaps to become as independent from "them" as possible. Alternatively, one might think of moving to a place a where they are - more trusted, or on a relative basis, less mis-trusted.

Jesse said...

Fear and greed. No need to look further than that.

PaxAmericana said...

Cheer up, the Anglo-American Empire couldn't last forever.

"...somehow uncivic-minded - a wasteful employment of intellectual energy that might be set upon making what is systemically and socially un-well, better."

The wasteful use of energy in, say, gold mining is minuscule compared to the waste of having bright minds creating financial instruments.

Speaking as an opponent of the current system, I'd be happy with an oil standard, or even Lincoln's Greenbacks, though I'd recommend whoever works on a new system start by reading Aristotle.

Chris said...

I note that this post has received a statistically significant increase in the number of comments compared with your previous posts, suggesting you're not the only one with a visceral reaction to Gold.

I think Michael Pettis, William Buiter, and others smarter than me have made a strong case why the dollar, stuck inside a rolling snowball of global trade imbalances and fiscal deficits, is tumbling towards devaluation. As one of the previous commenters noted, the gold price reflects this expectation much more than it forebodes the use of gold as a currency.

I would suggest your emotional response perhaps reflects disgust that investors preaching some intrinsic value in the metal are able to light victory fires and howl at the moon for the short-term, while you and anyone else that doubts the value of a shiny metal is left to wonder if they should have joined the rituals or at least bought more shotguns instead of performing risk analysis and calculating IRRs.

la Quinotaur said...

funny how no one even mentioned that photo under the title of the post.

for anyone holding even an ounce of gold, may i ask if you please to click that photo and take a long hard look. now take another one at their hands, their arms, their faces.

now riddle me this goldbugs: do you really want to live in a world that incentivizes more of this behavior (or the behavior that mitch alludes to above)? really?

now, patrick & kristiina are right : gold indeed has some powerful juju. it's the only element that the human body can not absorb. so perhaps this may be the reason why humans throughout history have gone coocoo over it, because it's the biochemical representation of the Other. (plus, it's so purdy when it shines)

*** btw, agree w/ patrick: holy mtn is a must see ***

speaking of 'history', there's this crazy myth that the Sumerians were enslaved by extraterrestial beings called the Anunnaki to work in the gold mines (in modern day Iraq no less) so that the Anunnaki could take back the gold to their planet to help save it from destruction due to the Annunaki's neglect.

there's also people who believe that 2012 will be the time when the Annunaki return. from how recent 'history' has been unfolding, this myth doesn't seem as silly lately as it did when i first encountered it.

could the relic be coming back to enslave us all again with many of us willfully walking right back into our shackles? could this be the possible source of your vague queasiness (mine too)?

even if so, just remember, there is a reason why gold is called a 'transition element' in chemistry...

p.s. to the goldbugs: if you all spent 1/2 the time that you do justifying your investment and/or belittling others that don't agree etc. into collectively creating an open-source complimentary currency with all the 'incorruptible' benefits of gold and without its costs to ecological & human realms, you might actually be on to the real thing we all seek...freedom.

just a thought

Mencius Moldbug said...


"Backing" of paper by gold has meant a lot of things in the past, most of them not quite kosher IMHO. Even in the supposed good old days, the Bank of England never had enough briquettes in the box to cover its notes. Frequent panics and crashes resulted as these card-houses collapsed.

I do not see these kinds of structures developing in the gold world, apart from the still rather dodgy futures market in which a colossal volume of 3-month gold notes is backed by God only knows what the hell what. Certainly not actual gold, or the OI would not go up and down like a yo-yo.

But yes, there is really no sane limit on the gold/dollar ratio if the former becomes the currency of saving. In fact, at a certain point this creates classic inflationary scenarios just through asset-price inflation in gold - those who have the briquettes feel so n**er rich that they go out and spend dollars like kings, just as in a stock-market boom. The dollars are then snapped right up and put back into briquettes. Total absurd Weimar Zimbabwe craziness results.

This is a long long way down the pike. But it can happen, and the endgame is not that the bubble collapses but that the dollar becomes such a hot potato that you never see it anymore, and people start doing their accounts in gold. Hey, at least all that debt would be paid off, mostly.

There is one constraint on this craziness, which is gold mining (and Cash4Gold mining). All those sellers need buyers. So you can assess the correct gold price on a dynamic rather than static basis - rather than dividing savings into briquettes, look at the flow of savings into gold that is needed to soak up all these natural sellers. It is still not a lot at present prices - especially as CBs become buyers. The big dog has got to eat.

Goldflation - devaluation against gold, calculated or spontaneous - is a remarkably straightforward way out of a number of economic problems for a lot of planners.

Consider the case of China. How many RMB do they have? A lot. How many tons of gold do they have? Not a lot. If you simply do a stupid division and redefine the RMB as a claim against physical gold reserves, what is an RMB? A tiny speck of gold. A penny's worth.

This is devaluation. The economic effects of devaluation are well known. They resemble those of cocaine. The trouble is: if one does cocaine all day, one becomes a cocaine addict.

But if you devalue to gold, when the Weimar dust settles, you have a perfectly healthy monetary system, based on gold, with little or no debt. The inflation is forced to stop. Thus the magic panacea is achieved: drugs without addiction.

As for the critter? We took her to an airshow the other day and the planes were doing loops. "Circle cloud," she said. Not bad for eyes that never saw a world with Bear Stearns. Pretty, too...

PaxAmericana said...


Do you hold even a single dollar? If so, take a look at pictures out of Iraq. That was largely possible because of the American hold on the world financial system, and you were supporting it.

Phillip said...

la Quinotaur - Totally agree with your ps to goldbugs. Other striking photos in "The Real Price of Gold" from National Geographic:
It would be incredibly easy to monetize real renewable wealth like wheat instead of monetizing debt but that would require intelligent cooperation instead of greed. This would produce the earned income and prosperity that debt is currently displacing. See I do find it difficult to blame anyone for taking defensive measures like buying gold given the current debt-based system but would be far better to work at reforming it.

la Quinotaur said...


yes i do in fact. unfortunately, i'm entitled to use it as a medium of exchange under the current laws where i choose to reside at the moment. and i'm quite cognizant of the amount of blood & oil & coca that has stained each and every note.

i also own exactly 1 oz of gold (& more than a few ozs of silver) and have asked myself the same question i've asked you before.

the original question & challenge still remains unanswered.

Philip: thanks for the link. very much enjoy the read so far.

and to clarify, the original post was not to assign blame to anyone, only to give expression to the hidden costs of precious metals.

i understand that gold is a necessary weapon and a useful one. but is it the end-all-be-all foundation of an evolving civilization given what we know already of how it's been used & abused in human history?

if so, the above questions need to be addressed & considered in an upfront & thoughtful manner without resorting to continuously attacking the messenger, lest we again become the enemy many of us wish to be free from.

Phillip said...

la Quinotaur,
You may find Charles Walters' essay on The Nature Of Money worthwhile as well: