Thursday, April 08, 2010

What Glitters Is...Sweet??!??

I met a chap while waiting in the queue to ascend the Grand Montets, after a particularly heavy snowfall. Unlike the ultra-gregarious Swedes, the loud but polite Brits, or the serious and contemplative back-country types with the Phat boards, shovel and extensible avalanche pole, he had his nose buried in Soros' latest book, as good as a conversation starter for an obsessive financial type as there is.

Starting with the [now seemingly forgotten] crisis, we talked of many things, before it turned to "Gold", which he volunteered, he thought was dumb. Not that he thought the vaulting price was stupid. He offered no opinion of that. But, he said, the war years were tough. Really tough. (He was not of Serbian descent, as it would happen). He'd seen his friends, he explained, do the smash-n-grab (not literally) thing following the disintegration of what was Yugoslavia, rolling up ill-gotten gains into (amongst other material objects) hoards of gold. Their hedge. Their so-called mad money, for which he said chided them at the time, though to little effect. But, he went on, when things got really dire, there was no market for it. There was no way under the circumstances to reasonably convert the hoards to what one really needed. As a result, the going rate was all over the map, but half-ounce or ounces were commonly traded for sugar and flour in ratios that would make the wealth-hedging gold-bug weep. I listened intently, though it was just an anecdote, but an interesting one nonetheless.

And so it is with some wonder that I notice that a great number of admirers of the most precious metal also seemingly (if I might take liberty with a generalization) are predisposed to believe that coincidental to the impending fiat money collapse will be a breakdown in the Rule of Law. Admittedly, gold may serve (or already have served) well as a tonic against large monetary dilution, incessant quantitative easing, continued unsterilized central bank consumption of newly-issued Treasury debt or merely fears of the aforementioned. But but do they think will happen when they really need it, like, trading those coins pure-gold coins (bling broach, or watch), for something tangible. If history is a guide, they will get sooooooo totally hosed. There is a non-sequitir in their belief structure that somehow a few guns, bit-a-ammo, stash-o-gold, a Kazcynski-cabin maybe some C-4 and a coupla' detonators, will keep them more-than-buoyant during ummm errr the re-ordering.

Viewed from this point, gold is a trade, for ruminating upon my Bosnian acquaintance's anecdote, there is a point - call it the "Oh Fuck moment" beyond which Gold is quite sub-optimal, and sugar, petrol, some vegetable seeds, a goat or two, an alembic, all make seeming better sense. Or, perhaps in the extreme, the best hedge in the event (if you believe in the event) of a breakdown in the rule of law, is to BE the baddest thug, and/or join/align yourself with the meanest thugs around, a paradoxical feedback loop that leads one down a disturbing rathole indeed.

But what is Jim Rogers thinking will happen when and if law and order breaks down? Does he expect to cross the border (on his motorcycle?) to the (recently nationalized) Swiss depository holding his metal, and expect it just to be handed over to him? "How would you like it, Monsieur - in the big shiny bars or the shiny petite pieces??" Will he put it in his sidecar? How will he get it home - to Singapore? He would presumably need a small and loyal army, which if well-organized might, themselves, think twice about prevailing errr ummm distribution of wealth. I say this somewhat tongue-in-cheek, but I am sure readers can conjure others.

The fear trade is obvious, but it's a fear trade. I have no answers. But I can spot a financial non-sequitir from a distance, and it deserves some exposition and further mental kneading.


OSR said...

I've always maintained that when it gets down to nut cutting time, we will most certainly revert to a metals based economy. Unfortunately for the gold bugs, the metal of choice is most likely to be lead.

IF said...

Well, you are not really describing anything new to me at least. I have seen plots of purchasing power of gold. It fell a lot during the world wars. In Germany people could buy stuff from the farmers in the first year or two after WWII for their gold, but at bad prices, as you describe. Gold might be good as capital for *after* the shit ends, but even then not immediately. And look at mother Russia. Gold was no good between 1917 and maybe now. Owning gold in the 1930s probably meant death. While in the 1950s to 1980s gold was usually available in jewelry stores (not too expensive, as export was illegal). While one could buy jewels in the 1980s, TV sets and sausages were rare. And in the 1990s? Converting the gold might have doable (if unsafe), but the world spot price was lousy. Both things have changed. A 90 year wait for gold to be safe to use and valuable again is a long time. Personally I would stick with canned tobacco as trading sardines. It lasts long and is lightweight. Good prices during the war in Yugoslavia as well. Or maybe canned pot would be more profitable, but also more dangerous. The end of the world trade, as one would expect, is quite tricky. Just for hedging purposes it should probably involve somewhere a catholic priest and a bottle of red.

Anonymous said...

Timely reminder of what a gold/perishables exchange rate might be.

I hope it doesn't get that far down the rat hole. I might be too heavy on the gold and precious metal miners.

Jim Grant who is often early, years early, has been writing that an employment turn-around is going to happen.

V said...

Even so if it comes down to you (with a few gold coins) versus some other guy with a wheelbarrow of paper money, who are you going to trade with even if you are only bidding for a loaf of bread?

Demetrius said...

In the 1940's cigarettes did nicely as did sugar then. Our local racket was in cigarette lighters, portable, useful, robust and a means of exchange. People who wish to trade will find a means. At the moment I am into cowrie shells.

Anonymous said...

not sure what question you are asking?
Which fear are we talking about? If it is Mad Max, Oil was the preferred substance if i recall correctly

Bron said...

For the Mad Max scenario I don't think the point of gold is to use it as money for the things you need desperately, better to hoard useful stuff.

Gold is a wealth preserver and that means burying it and only digging it up when some semblance of order has returned and the price of gold is more reasonable because no one is so desperate for food they are prepared to trade it away at a fraction of its cost.

This of course assumes the Mad Max period is relatively short, unless you are bequeathing your buried stash to your children.

Buzz said...

Apocalypse Now for many.

A wheelbarrow full of money? A bag full of gold? What difference in the goldbug version of the economic apocalypse? I have run my milling machine, my lathe and my tig welder in trade for 2 dozen avocados or a fillet of lingcod. Avocado's are rich in essential omega 3 fatty acids as are fish. They can also be expensive and somewhat rare at times. Gold as a trade requires some hope of *order* on the other side. The doom and gloom goldbugs tout the ultimate collapse...order will not be part and its 'return' may take longer than you have.

I'd rather EAT......

Guava said...

Your views on this topic are really interesting and give a clear cut view. Thanks for sharing the knowledge.

Anonymous said...

I totally agree to your observations regarding the worst case scenario. Still it might serve to take into account the German inflation scenario of the 1920s, meaning monetary collapse without total breakdown of order.

Those with Gold and hard currency did amazingly well in those circumstances and could make a grab for nearly everything they wanted, be it consumption or purchase of productive facilities.

Gold to my understanding is an insurance policy, the price of which is the absence of yield. It's value rises with the proximity of the monetary event, which might bring out its actual usefulness and declines with its remoteness, driven by market consensus. Given the historical evidence that the majority is usually wrong in their assumptions, I'd consider the current scenario a bubble and the investors part of the losing majority.


Bron said...

Finster, you are right about the majority, but wrong that gold is a majority trade - it is still a niche investment, we are nowhere near mass market interest at this time.

martin said...

non sequitur

Anonymous said...

Part I
It's clear to me that this guy is the typical coddled American. He probably grew up in a nice middle class home, had an Ivy league education, and has bought hook line and sinker the propaganda that the Federal Reserve banking cartel has been feeding the gullible for the last 50 years, i.e., that they know what they're doing or that there is something of tangible value behind their money printing monopoly. He largely trusts government, doesn't own a gun, and has likely never experienced any real hardship in his entire life except for not getting his latte order filled at his local Starbucks because they ran out of milk. Let me say a few things:

(1) If the proverbial shit does hit the fan, he and his family will be the first ones to end up dead. This moron has the survival skills of a lemming and will be waiting for the government to come save him. His metal of salvation will likely be lead.

(2) My family experienced the Weimar republic and Nazi Germany. With regard to Weimar, those people who held gold before the hyper-inflation occurred maintained their wealth. With regard to the Nazis, many people who held gold were able to smuggle themselves out of the country or bribe their way out of a seat on a train to a concentration camp.

(3) Gold has been money for 5,000 years. It is accepted as money on every part of the planet from the remote tribes in New Guinea to the streets of Manhattan. It will continue to be accepted as money long after the Federal Reserve notes, that we mistakenly call U.S. Dollars, are only suitable for wallpaper.

(4) Yes, he is correct that owning a stockpile of food and other exchangeable commodities will be potentially more valuable than gold in a crisis. Nevertheless, I don't think that in a crisis you're going to care too much about the exchange rate as long as it buys you and your family food and safety.

Anonymous said...

Part II
(5) Is man's desire to possess gold logical? No, of course it isn't. But it is a finite commodity that can't be reproduced at whim in our Ponzi world of fiat currency. It has and always will represent some semblance of certainty in a world largely controlled by banking crooks and government criminals. If this guy is looking for logic he should move to the planet Vulcan with the rest of his Star Trek buddies. Oh, and they can bring their Federal Reserve notes with them. I'm sure that the logical Vulcans will look at the Federal Reserve's balance sheet and conclude that those pieces of paper really do represent something of value.

(6) Conveniently, there is no mention in his blog about the thousands of Bosnians who survived because they had gold and who after the chaos subsided were able to rebuild their businesses and lives because they didn't put all their wealth into pieces of paper currency that became worthless.

(7) So gold is a "fear" trade. I got news for this genius, life is a "fear" trade. Every investment is ultimately a "fear" trade. This guy thinks he can spot "financial non-sequitirs" from a distance. If he really can then why doesn't he own his own island somewhere? Didn't he foresee the tech bubble, the mortgage bubble, etc.? How about the financial non-sequitir of the ever debasing Federal Reserve note, a share of AIG, a share of Citigroup, a share of Enron, a share of Worldcom, etc.?

(8) I suggest that this guy buy a few gold coins. He might sleep better at night, and he might be able to buy that latte when milk gets really scarce, or more importantly save his child's life. Oh, but I forgot he can see into the future. He's good at spotting financial non-sequitirs and preparing for them. He trusts big brother to take care of him. He might want to talk to a few people in New Orleans about their recent experiences and then do some "mental kneading."

In conclusion, I'm sure glad that he trusts our Treasury Department and the Federal Reserve. Someone needs to keep buying those Weimar bonds, sorry I mean Treasury bonds. After all, the idea that someday Treasury bonds and Federal Reserve notes might be less valuable than gold is certainly a financial non-sequitir.

kass said...

You are opff your nut.
This "guy" is a woman, for starters, and a very sharp one.
You are seriously off the mark in your assumptions. Your anger, apparently free-floating, is clouding your vision, thinking, the works.
Cool down and grow up kid.

Anonymous said...

Martin, sharp observation, though I don't buy the niche investment story anymore. Too many people are talking their book in gold and too many advertisements for gold and commodities are floating about.

The ultimate mass bubble at the moment of course is 'risk free investment' and US Treasuries.

Regarding our angry friend: Too many scare stories and Mad Max scenarios abound, interestingly mostly propagated by people from the UK and US which probably were furthest from the harm of the 20th century. It's useless to assume an investment stance based on a scenario of anarchy. It's as wise as lining your coffin with extra silk. The old order in finance often breaks down without a breakdown of order.

with compliments to the sharp woman who maintains this blog

Anonymous said...

Dear Kass, I plead guilty to not having any patience with stupidity. I suggest that you join your little girlfriend on her ski holiday in Switzerland - I hear the snow is good - and "kid" don't worry yourself too much about these issues. They're clearly above your pay grade. Switzerland is a nice country, my father was a refugee there. Oh, and as you know, they don't believe in holding gold either. Enjoy the snow!

james said...

How much gold do you need? Enough to bribe the border guards, so the old saying goes.

Kass said...

Wrong country, Anon. Try France for Les Grands Montets.
Like I said, cloudy brain.

Anonymous said...

Dear Kass, so so sorry to have mistaken the Swiss Alps for the French Alps. That would certainly be a fopaux at one your little soirees in the Alps. To make amends I will send a few gold coins on your behalf to the families of the coal miners who just died in West Virginia that mine the coal that makes the electricity that heats your cloudy little lattes. And how should I address it - from Kass and her girlfriend skiing in France, the experts on financial non-sequitirs, and although we really prefer that green energy heat our Manhattan lofts, we're really sorry for your loss.

kristiina said...

Been reading Slavoj Zizek's First as Tragedy, then as Farce. He is quoting Keynes on the logic of stock market: "We have reached the third degree where we devote our intelligence to anticipating what average opinion expects the average opinion to be." This is probably something everybody else knows, but it is new to me. So, if there is a fear trade, it is the guess of average opinion as to what may be the average opinion in the future. I'd say this mostly tells that average opinion does not really see the road ahead so a little bet in the fear department seems like a good insurance. Of course, it is as well thought out as the average opinion always is. Of all mysteries of the world, the average opinion has been always the hardest for me to understand.

As to Mad Max scenarios, i have to say that bands of thugs have very little survival value beyond their own asses. Survival means raising offspring successfully. No offspring, no survival. But then, i guess Mad Max is the average opinion's idea of survival.

Anonymous said...

Part II
Now, one more question concerning financial non-sequiturs. This should be easy for some of you since you can “spot a financial non-sequitur from a distance.”

If, as according to our current dear leader, the U.S. will be running annual trillion dollar deficits well into the next decade, and if the Federal Reserve, run by the same geniuses from the Ivy League who have so adroitly managed our government during the last several decades, decides to faithfully service this debt they will:

(a) Pretend that it doesn’t exist and just issue more debt.

(b) Print a lot more Federal Reserve Notes to make servicing that debt cheaper.

(c) Steal as much money as they can before the whole house of cards collapses.

Sorry, that was a trick question since a, b, and c are correct.

For the last decade other central banks, hedge funds, and individuals in China, India, Germany, Argentina, Saudi Arabia, Australia, Canada, etc., etc., are not buying gold because of Mad Max scenarios. They’re buying gold because, unlike many stupid Americans, they remember their history and they want a store of value for a portion of their wealth. They don’t trust the current keeper of the world’s reserve currency to have any monetary or fiscal discipline whatsoever. I’ll leave you with a nice quote from another “smart” economist who after he joined the private banking cartel of the Federal Reserve became a proponent of easy money – kind of like joining the Roman Catholic clergy and changing your views concerning the use of little boys and girls.

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value,” from a paper written by the young Alan Greenspan.

Now, stop spending so much time on Facebook and watching Mad Max reruns and buy a few gold coins – you might just have some savings worth something in the next decade. Otherwise, just keep all your wealth in U.S. Treasuries and Federal Reserve notes and don’t worry Ben, Tim, Barack, the Democrats, the Republicans, and Congress will take care of everything.

Anonymous said...

Part I
Okay, please listen. The increase in the price of gold has nothing to do with Mad Max scenarios. You kids have been watching way too much television. Let me make this simple. I’ll put it into a format that you’ll understand. I assume that you’re all accustomed to taking standardized tests. Below is chart of the closing price of gold during the last ten years. Gold has increased over 300% in value because:

2000 - $273.60
2001 - $279.00
2002 - $348.20
2003 - $416.10
2004 - $438.40
2005 - $518.90
2006 - $638.00
2007 - $838.00
2008 - $889.00
2009 - $1096.50

(a) It’s shiny and bright and people just like the color of it.

(b) Barney’s, Bloomingdales, and Tiffany’s have greatly increased their buying of gold in order to meet the jewelry demands of women with Wall Street bonuses who take skiing vacations in the French Alps.

(c) The value of gold has increased relative to the accelerating debasement of the amount of Federal Reserve notes in circulation.

If you chose (c) you’re beginning to get it. You may remember that it pertains to a big word that you learned in between discovering Facebook, boys and/or girls, partying, and Economics 101. It’s called inflation, and it’s not the meaningless government statistic, it’s a measure of real inflation.

Anonymous said...

Cass: Admittedly, gold may serve (or already have served) well as a tonic against large monetary dilution, incessant quantitative easing, continued unsterilized central bank consumption of newly-issued Treasury debt or merely fears of the aforementioned.... The fear trade is obvious, but it's a fear trade. I have no answers. But I can spot a financial non-sequitir from a distance, and it deserves some exposition and further mental kneading.


There is no non sequitar. The trade is exactly what you concede: a hedge against devaluation of cash, but continued rule of law.

That outcome is realistic, but by no means certain. The IMF has done studies showing that a country with mostly short term debt, such as the USA (average maturity of 4 years), can burn away its debt by devaluing its currency, by doing a massive one off devaluation. Say a mandatory conversion of 100 "old buck" for 1 "new buck". Gold and other tangible assets are a hedge against that happening. And if you don't believe this can happen, just look at the neo-liberal and neo-conservative cabal running the US government. I mean, who trusts Geithner, Duddley, Bernanke, Yellen, and co to do anything but screw the middle class with a steep yield curve, dollar devaluation, etc.

To hedge against social breakdown, Rogers has recommended buying a farm in an out of the way place.

Cassandra is conflating the hedges Rogers recommends.

Anonymous said...

Anon, thank you very very much for your excellent comment in response to Part I and II. I was beginning to wonder if there was any intelligent life out there. Please watch the excellent interview with John Brynjolfsson on Greece, link below:

Buzz said...

>"....Rogers has recommended buying a farm in an out of the way place...."

Well heck! I thought that was what I sorta said in my NON-financial duyfuss sorta way. I figured the *smart* people on here would have figured that out.

Anon of "Part 1 and part 2"; I think you are suffering from a case of Taleb's dreaded 'confirmation fallacy'.

I hope your Briggs and Stratton powered Chinese manufactured lawnmower(that I know you bought at COSTCO) fails!


Anonymous said...

Buzz, I really hope that there is no confirmation, but sadly the leadership in both political parties is completely bankrupt and the Fed banking cartel has total control. I don't see much prospect for non-confirmation.

And please don't tell me that Obama and company represents change. Amusingly, there are enough Bush appointees in his administration to fill a city hall. It's simply a shift change at the helm of the Titanic.

I don't own that mower yet, but I'm headed to Costco now. We all have to do our part to stimulate the Chinese economy. LOL

Johnny Abacus said...

Ferfal says that in his area in Argentina, lots of gold dealers popped out of the woodwork pretty quickly following the collapse, although most of them dealt primarily in 14k-18k gold and would only pay those rates. Only a few people like banks would deal in pure gold, but going to a place like that meant risking kidnapping.

Anonymous said...

In response to V, screw gold...definitely for the wheelbarrow. A wheelbarrow is super useful.

Plus the bonus is you can light your campfires with the paper.

Anonymous said...

(a different Anonymous)

I recommend listening to the talks of Dmitry Orlov (

He offers practical advice on the collapse of civilization. Forget gold. Energy is where it will be at.

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Sean said...

Gold really only has value if you able to jump ship to a country that has not decended into chaos. For those Jews in WWII that were able to get out, gold was vwery worthwhile. For those that couldn't get out, simple stockpiles of coal were more valuable. Gold won't feed you or warm you when the shit really hits the fan in an economy you'rte stuck in.... which raises the real concern that if globally we are heading for a new shit-fest (I fear is 3-5yrs out from now) because gov't still lack the courage to make real structural change, where will we run? and if we have no where to run, will gold have any value?

Sabremesh said...

Nicely written article. Gold becomes sub-optimal (ie loses much of its purchasing power) at both extremes of the socio-economic spectrum - ie in peaceful periods of great economic prosperity at one end, war and famine and social disorder at the order. As you approach the middle of spectrum (actually most societies throughout history) gold is money.

If things ever get so bad that gold ceases to have any value, we'll be facing an extinction event.

Ken said...

Hi all,

I can related to what Anonymous Part XX says, but not to his/her absolutism. That said, it seems from here that the extremes of the curve (mad max on the left, 'everything works out fine' on the right) are the outliers and that something in the middle (in which gold retains something like its current value) are more probable.

As Sean points out, one's best bet is to get to somewhere safe rather than try to fight it out where you are. What's the use of a farm in boonies, if you can't get there from your city dwelling?

I also like the idea of stocking up on compact, high-value items for barter (sardines and canned tobacco were suggested) if one has the space.

bobn said...

Ferfal also says that farms in the boonies are good places to get tortured and killed.

I feel like part of the answer is diversification: get some gold, get a some guns and ammo, get a bunch of storable food. Hope that guns and food last long enough that the gold has value again/still.

The last thing to do is to assume that the next 20 years will look like the last 20 years. Not gonna happen. There are too many things working against us, most of them already baked in.