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BookmarkWhat are the ‘fundamentals?’ That gold is an asset which is no one else’s liability, for starters. Beyond that, the last month has provided you with evidence that in a pinch, the political and monetary authorities will confiscate your savings. Central banks across the planet continue to print money and monetise government debt. These are all facts too.
It tells you that the people who control and profit from the printing and use of paper money are willing to do just about anything to retain their rank and privilege. It’s their system, and it works well for them. They do not like the gold price acting as a signal of public confidence (or lack thereof) in paper money or public finances.
But take all the emotion of wild price swings out of it, if you can. Ask yourself whether you think paper money will gain or lose value over the next ten years. And then ask yourself if you would rather have money in the bank or precious metals in your hands. The answers will tell you all you need to know.
Besides, speaking from experience, this is the first time in almost ten years we can remember gold being a hated asset. It was hated in the early part of the decade for all the same reasons: it had no real economic use…it produced no yield but held storage costs…it didn’t do anything other than sit there and look pretty in a cold dark room.
The people that didn’t understand gold then don’t understand it now. The only difference today is that the horrible price action has brought out the gold bears from the wood work. They are exacting their verbal revenge. The crowd is baying for lower prices.
Of course, it could be that we are so embedded in our own position, so wedded to our own beliefs, and so complacent after twelve years of rising bullion prices, that we’re either incapable or unwilling of considering the evidence in front of us. It is possible we’re refusing to see the gold bear market because we’re emotionally attached to our own position?
Yes, of course it’s possible. Every investor believes he is a genius during a bull market. Part of Warren Buffett’s credibility is that he began his investing career during a period when a great expansion of the money supply led to an historic rise in corporate profits. Buffett had the good sense to be born at the right time and ride the trend.
It’s important to know your limitations as a human being and not to mistake good fortune with personal brilliance. But if you bought gold any time in the last ten years because it’s a real asset and people having being using it as a means of exchange and store of value for 5,000 years, not much has changed in the last week except the price of an ounce of gold. As a monetary asset, gold will be around long after the Yen, the Euro, and the Dollar are being used for toilet paper.
Even artists – not famous for their interest in financial matters – seem to know this. One of the exhibits we relished at Hobart’s Museum of Old and New Art took some time to sort out. This is as it should be with a good piece of art, whether it’s a book, a movie, or something else. The meaning – if there is one – shouldn’t come right out and hit you on the head. If it’s too obvious it’s either a soup label or a traffic signal.
The exhibit in question looked like a long line of leaf patterns on coloured paper, at least from a distance. As you got closer – and you’d have to lean in really close to examine the paper each leaf was matted on – you could see that the coloured paper was really a collage of old paper currencies. Most of them were from places in South America or South East Asia.
You could have a good philosophical debate over whether anything in life or in the world has actual, objective, meaning. The answer to that question is beyond the scope of today’s Daily Reckoning. Our own view, if you must know, is that human beings are meaning-making-machines.
To the extent that we use the same senses to perceive the world (hearing, seeing, touching, and tasting), and share the same fallible human heart with all its emotions, we tend to find similar meanings in works of art. That we extract the same meanings from movies or books or famous paintings could be because we’re looking for them to begin with, or because the artist has been adept at conveying what he or she meant.
But again for the purposes of today’s essay, why we believe in a given meaning isn’t that important. For example, in the case of the leaves painted on paper, we can imagine a political and ecological message. All these forests cut down to make paper money, which is itself now worthless. Something real turned into something unreal, with something valuable lost and nothing worthwhile gained. That is one meaning you might construct.
Another meaning might be that money doesn’t just grow on trees. Money IS trees. You turn a real, tangible asset into an idea. The idea is that the note in your hand has value because everyone agrees it does. Everyone also agrees that the note is really just a beautiful tree reduced to a wallet-sized portrait. But you can still exchange your trees for other real assets, like wine, food, or gold.
Trees come and go. They can be cut down, burnt, or logged to extinction. Paper money is ephemeral. It has always come and gone through history, because those who print it cannot resist the temptation to print more. They always do.
Gold is un-tree like. It’s difficult to destroy. It doesn’t grow on trees. And you can’t extract more of it from a printing press. That’s why people have always used it as a store of wealth and a medium of exchange. Its physical properties give it a reliability you can never get from paper money issued by a government that’s not backed by metal.
Is that an orthodox or unfashionable view? It certainly looks like it, based on the last few days of trading in the gold market. Does gold care? Not a jot. Will today’s paper currencies be the museum exhibits of tomorrow? Only if they don’t all get burned to produce something useful first, like heat. For now, all the heat is on gold owners.
