We are developing the social individualist meta-context for the future. From the very serious to the extremely frivolous... lets see what is on the mind of the Samizdata people.

Samizdata, derived from Samizdat /n. - a system of clandestine publication of banned literature in the USSR [Russ.,= self-publishing house]

Tom Clougherty makes the case for gold

Incoming: another of those emails that I get from being on the Cobden Centre insider list that surely won’t mind being reproduced here, this one being from Tom Clougherty:

City AM asked me to make the case for gold in 140-words, for this morning’s comment pages. Not an easy task, but I’m fairly pleased with how it came out.

I’m off out now, and will read this later, but Clougherty’s a good man and I’m sure I’ll like it.

Blog and learn. I just found out that he has his own blog.

Picture of a younger Clougherty (with friends) here.

18 comments to Tom Clougherty makes the case for gold

  • Lee Moore

    I own some gold, and have long bought into the idea that its value is related to the excessive printing of paper money (inversely.) But I think it’s a mistake to say that as governments are printing loads of money, you should buy gold. The real question is not whether governments are going to go on printing more money, it’s whether they’re going to print more money faster than we currently expect them to (buy gold) or slower (sell gold.) This is the same as for any investment. Should you buy Apple based on the fact that it’s a very successful company ? No. You should buy it if you think it’s going to be more successful than the market currently thinks.

    It’s also not quite true, as gold bugs often say, that you can’t print more gold. You can’t print it, but you can find it and dig it up. Currently the costs of production are in the $500-$1,000 range, which means that taking into account depletion of reserves, $1,000 to $2,000 is plausible for the price. If the price of gold shot up to $10,000 an ounce, without the costs of production going up, you could be pretty sure that there was an unsustainable gold bubble. People would rush out and dig up more gold, even if it cost $2,000 an ounce to produce, and the price would fall back in due course.

    While I’m slaying dragons, there’s one more left, this time from the anti-gold mob. Which is that gold, unlike dollars, has no intrinsic value, because it brings no income, whereas you can lend out your dollars at interest.

    It’s true that gold carries no income. But the same is true of dollars. In order to get income from your dollars, you have to lend them to someone at interest. What gets you the interest is the loan, not the dollar bill. Gold is the same. You can lend gold at interest (although the gold loan market carries very low interest, and generally only banks and governments have enough to make it worth the bother.) Again the income comes from the loan not from the ownership of gold. So next time you hear someone arguing that gold carries no income and so must be worth less than paper money, remind them that paper money carries no income either.

  • Ernst Stavos Blofeld

    While I’m slaying dragons…

    I think you rather over estimate the power of your comment, hahaha. Gold is a defence against excessive increases in money supply, so if you think the money supply in the EU and USA is on the wrong side of the boundary, gold is one of the few dependable ways to defend your wealth. If you don’t think that, well feel free to go short. Good luck.

    We’ll chat again in 5 years and see whose dragons got skewered.

  • Steven Rockwell

    I think that many people forget that gold ownership can be made illegal with the stroke of a pen. FDR did it once. He just said you can’t have it, you must sell it to the government at X amount, and that was that. Federal agents had to be on hand to open a bank safe deposit box. It will be hard to hedge one’s financial bets when one can’t even get the gold legally to trade.

    And then there’s the storage question. How many people actually can lay hands on the gold they own? How much of your gold is inaccessable to you without jumping through hoops, waiting until a bank reopens, or sending away to a brokerage house for it? If someone “owns” gold, but can’t physically control it, do they really “own” it?

    Finally, assuming the market collapses entirely, how do people think they’re going to convert the gold to something usable? Or even trade today for its real worth? I have boxes full of dead grandparent jewelry, but even if gold is trading at 1600/oz, there is no way I can sell it and get anywhere close to that value, even if I do emlt it down into something like coins or ingots.

    I’m not saying gold isn’t a good investment, but I’m also not on board with those that think gold means a spot in the lifeboat.

  • PaulM

    I’ve been buying physical gold and silver since 2002.

    Recently Ron Paul held a one ounce silver coin up to Ben Bernanke and pointed out that, in 2006, the silver ounce bought 4 gallons of petrol (US) and in 2012 it bought 11 gallons of petrol, not only preserving wealth in the face of QE but increasing it. In the face of “increasing” petrol prices also! It’s a good example of the paper values dropping rather than gold increasing.

    The comment that people would just dig up more gold is misleading, it takes years to find and get approval to open most any sort of mine.
    Just do a swift check on the problems being encountered in opening up the huge finds in Alaska via Northern Dynasty (NDM.TO) and this is copper and gold in large quantities.
    Also bear in mind the rarity of gold, a new find of ,say 10 grams per ton, is considered very good indeed.

    I’m still buying in physical and I don’t keep ANY of it within the banking system.
    I don’t keep it all in one country either, so long as it’s allocated holdings and you have the serial numbers and exact weight of each bar that’s about as safe as you or I can make it.

    I’m sure that precious metals will return within future currencies, probably starting with the Chinese, they, and the Russians are buying tonnes of the stuff!

  • Fiend's Brave Victim

    Claims by the first commenter about the cost of gold extraction are way off. Currently around USD1350/ounce average apparently, according to report I just read about twenty minutes ago.

  • 'Nuke' Gray

    I think that if the libertarian side wants a colour, it should be gold. The gold Party would instantly identify us as believers in metal-based monies (money wouldn’t need to be literally gold- but there’s also no reason why it shouldn’t be, and gold has history behind it.). Perhaps Gold ‘L’ on a silver background?

  • John

    PaulM: I’m sure that if gold really was $10K/ounce then any new mine would be approved very very quickly.

  • Fiend's Brave Victim

    @Lee Moore,

    You are missing the point I’m afraid. Should gold increase in value from here it will be because of two things: Firstly the collapse of any price supression schemes on behalf of central banks that have been holding gold below fair value. Secondly, it will reflect the inflation of the money supply. The first reason is why people are holding it as a trade (although they are characterised as somehwat cranky), the second reason is why people are holding it as a ‘safe haven’. Where you are mistaken is that if the price of gold were to rise ten-fold from here, the majority of that rise would likely be due to inflation. It is therefore reasonable to assume that fuel costs would also be rising at a similar or even greater rate. Fuel is the biggest cost to the mining industry, and therefore the cost of mining it would rise alongside. Actually the mining companies are hurting at the moment already, despite the high gold price.

  • PaulM

    John wrote “PaulM: I’m sure that if gold really was $10K/ounce then any new mine would be approved very very quickly.

    Posted by John at April 11, 2012 07:21 AM ”

    It’s not the price John, the greenies oppose EVERY mining application, I have no good reason to expect that to change.
    Also there have been no elephant gold resouces discovered recently (other than Northern Dynasty and you should see the opposition fighting that for at least the last 6 years! The mine is still years away from approval, if ever).

    Any way if gold hits $10K bread will be $3 a loaf and the mining costs will increase also.

    All the gold ever mined would fit into two olympic sized swimming pools, it’s rare……..really rare.
    Therefore difficult to find.

    If it does hit $10K the best hope would be that even more scrap jewellery will come to the marketplace.

    Currently gold production increases above ground stock by close to 5% per year, a lot less than the fiat money increases.
    I’ll stick with precious metals until sound money reappears somewhere on the planet.

  • Fiend's Brave Victim

    Paul, 5% per year? I was under the impression it was historically more like 2% and has been pretty much rock solid at that level for a very long time—after all it’s the reason why it’s a monetary metal. Can you supply some data?

    Data on the Chinese market would be interesting, they have a law (because they’ve embraced capitalism) that gives the government first refusal on all gold mined in the country, I’d be surprised if reliable data was coming out of there.

    Apparently they pay COMEX spot for it mind, so at least they don’t seem to have any qualms over its price direction…

  • Fiend's Brave Victim

    Oh, and I saw some bread the other day (in London) at £6 a loaf. Mind you I was at one of those Farmer’s Markets that are going to save the workers from the supermarkets.

  • PaulM

    OK FBV you got me there! The price for not paying attention to detail is looking foolish. 2% is closer to the year on year increase, makes it even rarer than I suggested.

    Although the book “Gold Warriors: America’s Secret Recovery of Yamashita’s Gold by Sterling Seagrave and Peggy Seagrave” suggests that we can’t really trust anyone over how much gold is about, least of all the central banks.

    China used to export silver and now they import it. The last thing I saw on China and gold imports was that 40 metric tonnes of gold bullion from Hong Kong alone in February 2012. Hong Kong’s gold exports to China in February were at most 13 times higher in the same month last year.
    It’s this sort of statistic that leads to believe that China will have at least a part gold backed element in their currency.

    The physical demand will eventually overcome the paper shorts and the next 12 – 24 months look to be very interesting.

  • Lee Moore

    Evening Fiends – I agree that $10,000 gold is very likely to be accompanied by a substantial rise in the general price level. $10,000 gold is bound to happen – it’s just a question of when. All I’m saying is that the fact that it’s $1650 now, and at some point will hit $10,000, doesn’t mean that it’s a good idea to buy now. It all depends on how quickly it gets to $10,000, and what else you could invest your $1,650 in now and at what return.

    Since it’s gone up by 500% or so in the last ten years – much faster than the price level has gone up it builds in a certain amount of estimated future inflation. Whether the price currently reflects an accurate view of future inflation I have no idea.

    The essential point is not whether gold will do better than dollar bills going forward – except in the very short term it’s bound to do better than dollar bills, as inflation is bound to be positive. The question is whether – having already gone up 500% in ten years – it is likely to outperform other investments such as government bonds, property and equities, all of which are also likely to go up (including reinvested income) relative to dollar bills.

    When gold was $300 an ounce I was pretty confident of its likely outperformance over my investment horizon. Now I’m fairly neutral. Over the long term I don’t want to own much gold, as I think it’s a poor long term investment. But over the next ten years ? I think it’s worth having a reasonable amount in your portfolio.

    Anyway this is not an investment site, it’s a political philosophy site. So I’ll stick with my philosophical point. Inflation is not a measure of the current value of money, it is a measure of the rate of depreciation of money’s value. Whether gold is a good investment at any particular time depends on whether the market is accurately forecasting the rate of future inflation, not on whether some inflation might happen (it will.)

  • Laird

    While I agree with almost everything Lee Moore said, I do take issue with his assertion that government bonds (along with property and equities) are “likely to go up.” By “go up” I assume he means in market price. The price of fixed-rate bonds is inversely correlated to exogenous interest rates, and since interest rates can only go up (they are being artificially maintained close to zero now, and the government cannot keep that up forever because of the huge amounts of money it is creating through debt monetization) bond prices can only go down in the long run. I won’t have any in my portfolio.

  • Lee Moore

    Laird – guilty as charged. What I meant was that government bonds, bought at issue and held to maturity are, including reinvested interest, likely to go up in the sense that you will have more dollar bills at redemption (including interest) than you did at acquisition. In that sense government bonds are a better long term investment than dollar bills. But if you buy and sell in the secondary market, buying now and selling when market interest rates have hit 9%, you could certainly end up with many fewer dollar bills. Also you need to choose your government carefully. Profligate governments are hard to avoid, but profligate governments who have burned their own printing presses are quite likely to default.

    I don’t own any government bonds as I share your view that they are a horrible investment at present.

    But my old mother’s portfolio, which I manage for her, contains about 50% short term government bonds. This is on the basis that in the short term – the only term of relevance to her – the risk of a nasty accident to equity prices or gold prices makes it wise to keep a fair chunk in cash. And you want to be careful about how much cash to leave in the banks these days.

    Horses for courses.

  • Laird

    No argument with that, Lee.

  • Fiend's Brave Victim

    Phew Paul, you had me flapping on my fundamentals there!

    All good points Lee. I guess my take on ‘is 500% too much already’ is, probably not by a long way, and even if I thought it was more possible than I do, many many other factors make fairly confident that the market has a pretty solid floor not far from where we currently are today, and so at least I can be fairly certain in it at least holding value, if not growing hugely. The same can’t be said for much else, certainly not cash or bonds. Add the debasement in every major currency, signs of currency war, signs of proper, fighty war, increasingly good evidence for major price suppression schemes that appear to be unravelling, potential physical shortage, central bank gold buying etc.

  • Paul Marks

    Tom is right (at least over the longer term), but look how Trever covers himself.

    “this year”, so if the economy falls apart next year (which, of course, it will) he can say “I never said the Dollar and the American economy would be strong in 2013″.

    So if you are planning to die before November this year Trever may (only “may”) be giving sound investment advice.

    Of course if you are hopeing to live into 2013…… he is not (but TECHNIALLY he is – because he has covered himself).

    Gold is not an investment (it is not used to make much in terms of other goods) it is a store of value in circumstances of general economic chaos.

    Gold may lose its value also – but the age of gold would only be replaced by age of lead (of bullets).

    Gold will go up and down (violently) – but it will not lose all its value.

    Not unless we go into a Mad Max type world.

    However, the Dollar and stocks and shares….?

    Do not touch this stuff with a barge pole – not for the long term.