Case for Owning Gold Has Collapsed; A Perspective in Silver; Reader’s Question;

GOLD CoinsMoney transmits value, Mises taught, but money does not measure value. This distinction is fundamental in Mises’s theory of money. “Money is neither an abstract numeraire nor a standard of value or prices. It is necessarily an economic good and as such it is valued and appraised on its own merits, i.e., the services which a man/woman expects from holding cash. (Human Action, pp. 414-415). Gary North, Mises on Money

Read more on the value of money:

What is, then, the best monetary policy? He argues that in light of his previous considerations “the state should at least refrain from exerting any sort of influence on the value of money. A metallic money, the augmentation or diminution of the quantity of metal available for which is independent of deliberate human intervention, is becoming the modern monetary ideal.”[17] He adds: “The significance of adherence to a metallic-money system lies in the freedom of the value of money from state influence that such a system guarantees.”[18]

The Case for Owning Gold Has Collapsed; Yellow metal could be headed much, much lower Gold could be headed not much lower, but much much lower.  This was written on April 18, when the value assigned to the monetary relic (AKA its nominal price) resided at $1391 per ounce.  So be warned, Mr. Gold advises that gold could go much much lower.  Gold bugs take heed; Mr. Gold himself has put the double ‘much’ whammy on you!

The article: The Gold Dilemma. The article is riddled with logical fallacies. Using CPI and GDP to measure anything meaningful is a fantasy–even forgetting that those indexes are politically constructed by bureaucrats.

Another view of gold’s history: 99816519-Special-Report-Gold-2012-In-GOLD-We-TRUST.

Why I own gold bullion–as a hedge against monetary chaos. Own what the government can’t print.

All the Silver Ever MinedAll the Silver Ever Mined

A reader’s question from the prior post: Am I 100% in cash?  No, I have cash, gold bullion, selected precious metals mining companies, a few other companies, and a tiny short position in certain stocks like GE and CRM.  If you think holding on through thick and thin after buying at the highs EVEN with UNSUSTAINABLE Fed manipulation of money and credit is a good plan, then view page 8 here: A Lesson in Financial History by Mish. Also, for more perspective on the unsustainability of current corporate mean-reverting profit margins see: An Unsustainable Equilibrium_Hussman. View the video presentations here and consider a donation to cure ALS: People love to follow the crowd and momentum while mal-investment increases, so expect more S&P 500 movement to the upside until–unexpectedly–a surprise hits and people need to sell their “hot potato.”

But if you own great franchises at good prices then you have few worries. I wish I could find them now.

big-money-poll-2Short the SPY and Long PHYS for fun (not for real) at the highest offer for PHYS ($10,000 at $12.30 for PHYS) and lowest bid for SPY ($10,000 shorted at $158.10) on April 25 and lets see where we are in 12 months.

Update on April 29, 2013:bigSPY

Big sm spy




5 responses to “Case for Owning Gold Has Collapsed; A Perspective in Silver; Reader’s Question;

  1. Thanks for summarizing your views, and putting in links that support it.
    That answers your question to me.

    Ever considered that Mises and other great Össi theories could be :
    1) also riddled with logical fallacies
    2) correct but practically useless
    3) wrong but by coincidence seemingly useful.
    4) the world is slightly more complex than your macro teachers imagined….?

  2. I was a bull on gold for years, but switched bearish during the mania of summer 2011 and have been bearish ever since. I don’t think anybody can argue that central banks are flooding the world with money. Everyone knows this is occurring and laments about it, and professional investors keep pushing gold. You’d be hard pressed to find a big name manager who doesn’t like gold.

    The problem is that gold doesn’t actually protect you from anything – unless everyone else thinks it does. When Greece imploded back in 2010, almost all assets went down except gold and the US dollar. People thought that gold was a safe haven, and therefore it was a safe haven. Now, the situation is almost the exact opposite. Gold bulls have gotten everything they wanted in terms of bullish gold fundamentals, yet the price keeps going down.

    The problem is that gold is purely a psychological asset, and it’s only worth what the next guy is willing to pay for it. With most senior miners cash cost well south of $1000/oz, gold is clearly more expensive than pure marginal cost analysis would suggest. That premium is the amount that people are willing to pay for “protection” against inflation, the collapse of fiat currencies, or whatever other event they think they are being shielded from. But that premium is now falling because investors realize that other assets protect them from these events much better.

    If concerned about inflation, I would much rather own multifamily real estate than gold. Rents reset every year, so they should be well-indexed to inflation, and real estate is traditionally favored in inflationary times. Moreover, real estate produces substantial current yield, something that gold does not.

    If worried about sociopolitical unrest, the US dollar or US treasuries are a much better alternative than gold. The US dollar is being debased at a much lower rate than other competing currencies (i.e. GBP or JPY, and likely soon EUR), and remains the world reserve currency, making it an attractive safe haven. US treasuries also produce yield, and I believe are unlikely to fall much in value over the next few years because inflation will need an increase in the velocity of money, which will take much more time.

    I also agree with you that the stock market is fundamentally overvalued (although I have thought this for over a year now and been wrong), but I would even buy equities rather than gold if I was worried about inflation. In an inflationary stance, companies should have pricing power and grow their earnings near the rate of inflation, so equities should be able to keep pace with inflation over a longer run.

    I believe gold owners are figuring out this argument, especially as it pertains to the nascent bull market in real estate, and that is why they are selling.

    I also think the “gold is just another currency” argument is terribly flawed, as I have yet to go to a country where I can walk into Subway and buy a footlong with gold or silver. Moreover, if gold were a currency, it would be viewed with a great deal of skepticism considering it has fallen over 10% in one day before, something that has never happened with a major currency.

    I think as gold ETF holders continue to turn elsewhere to hedge their fears, the price of gold will continue to fall, regardless of what happens in the risk market. If stocks continue to rise, people will sell gold and buy stocks. If stocks fall, people will sell gold and buy real estate or treasuries. I strongly believe the bull market in gold is over, and over the course of the next couple years, we will see substantially lower prices, eventually falling well below $1000/oz.

  3. Dear Ananthan:

    To reply to all your points (in the next post) let me ask you what is your definition of INFLATION?. Can there be inflation with ALL prices falling? Gold prices have never tracked CPI.

    What is your definition of money? Do you consider gold as commodity money?

    Agreed that gold is NOT a currency. You can’t slap a bar of gold down to buy a house, for example, unless that particular owner wishes to accept it as payment.

    So how would you describe gold’s utility? What is it’s use besides electronics, dentistry, jewelry? Why are some central banks buying gold and/or asking for delivery (Germany asking the US for repatriation of its gold?)

    I hope to fully reply in a day or so.

    Thanks for the post.

    • Hi John,

      My definition of inflation is rising prices, with a bias towards consumer prices vs. asset prices. In the past few years, US consumer prices have been flat or falling in my estimation, while asset prices have been going through the roof. I believe a large part of the gold bull market was an expectation of CPI inflation, that has simply failed to materialize.

      I agree that gold prices have never tracked the CPI. Gold prices have risen and fallen for many different reasons over the past few decades, but that is largely my point: gold’s price is purely a psychological function. That would also be my answer to your question about gold’s utility, its utility is simply what the next buyer is willing to pay, or said another way, its utility is the reason the next buyer is buying it. That price had risen for a decade straight because of fears over monetary debasement, inflation, and general pessimism on the effectiveness of central banking, but it appears there are no more marginal buyers left.

      The advent of gold ETFs brought a huge number of new players in the market, and they were largely responsible for the run-up in prices from 2008 to 2011. However, many of these players were simply allocating to gold because their advisors were telling them to, without truly understanding why they were doing it. They were doing what investors do in any mature bull market, they buy because the price is rising.

      Now, these same investors are selling because the price is falling. Theoretically, they could turn around and start buying again, but the problem is, what would actually cause this? What positive surprise is there left for gold that has not already been disclosed?

      When gold prices ran up to $1900/oz in September 2011, it was not quantitative easing that caused it, but rather the expectation of QE3. At this point, the Fed has already indicated they will print an unlimited amount of money, only varying the size of their asset purchases, with no time limit set. It is already on the table that the Fed will print unlimited, so what positive surprise is left? Every other central bank has stepped up their liquidity too over the past 1.5 years, yet the price of gold continues to drop.

      My point is that, in the past, gold has served as protection against future currency debasement, but it has now ceased to serve that function. This is a problem because gold only protects us from anything if the rest of the market thinks it does. This key change in sentiment and market thought on gold is why I believe the price is falling.

      As I said before, with marginal cost on gold way below where it is now, there is plenty of room for the metal to fall. In the long run, commodities must return to their marginal cost, even after moving up or down according to demand shocks.

      As for central banks, I do not believe them to be a reliable indicator of anything. If they knew what they were doing, the GFC would never have happened in the first place. Also, central banks were massive net sellers of gold at the bottom in 2000, yet are big buyers of gold now that prices are near their all-time high. If anything, they are a contrarian indicator.

      Lastly, countries like Germany will probably continue to repatriate their gold because they are broke. European countries are some of the largest holders of gold in the world, and considering how high the price of gold is, I would want mine back too if I were them. With their failing economies and possibly soon to be failing currency, gold is their asset of highest worth. If Germany, Italy, and the EU were to sell their gold or have less of it, the credit of these countries would almost certainly drop, in the same way that if they had less currency reserves. However, with the Cypriot central bank selling gold to finance their bailout recently, the writing is on the wall that gold reserves may be tapped. This would turn the EU into net sellers of gold, potentially dumping huge amounts onto the market if their debt crisis ever flares up again.

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