Guest Post: Gold Is Rallying Because…

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Served by Jesse of Le Café Américain

Gold is a superior store of value.

It resists the attempts by the monetary authorities to debase it, because except for concerted attempts to suppress its price through non-profitseeking selling at key market points by central banks, and naked short selling by the global commercial banks in the paper markets, gold cannot be created and controlled by financial engineers like Ben Bernanke.

It provides a refuge, a store of wealth for private citizens during a period of general currency risk.

A simple chart should suffice.

As part of the quantitative easing regime, the Fed has so debased the financial system that dollar debt is paying negative interest rates once again as it did in the 1970’s.

In other words, it is costing money to hold dollar financial assets because of the mispricing of risk being engineering by the G7 central banks.

So, people and some central banks are seeking refuge in a stable currency that is beyond the control of the financial engineers.

“With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people.” Fredrich August von Hayek

“The gold standard has one tremendous virtue: the quantity of the money supply, under the gold standard, is independent of the policies of governments and political parties. This is its advantage. It is a form of protection against spendthrift governments.” Ludwig von Mises

Alan Greenspan himself states the case most eloquently in his famous essay from 1966 Gold and Economic Freedom.

“This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”

When the currencies of the US and Europe are debased by the financial engineers for the sake of the banks, when spendthrift governments run enormous deficits to fill the pockets of their special interests, informed wealth seeks a refuge in places where it cannot be so easily consumed for the exclusive benefit of the political elite.

This is sadly the case today, especially within the Anglo-American sphere of influence, from which the dollar had become the new opium trade, viciously addictive and debilitating. And so we have seen an historic flight to safety that began in the developing world, but is gaining momentum as the global dollar regime falters.

If you hold dollars, the Fed and the Treasury can confiscate your wealth, virtually at will. That is real power.

When the Fed lifts interest rates to again provide a positive return against inflation, then gold may stop rallying and reach a stable equilibrium price. This will be more difficult to do than it was to debase, as it is always easier to destroy than to create.

And it may be difficult to determine when that time comes, because the US bureaucrats have so thoroughly altered the Consumer Price Index over the past ten years that it is no longer a fair measure of inflation. Therefore it is a challenge to determine what is real and what is not, what is priced fairly and what is not. This is the hallmark of the modern western bankers and their accountants, and their demimonde in politics and the media.

Still, the message of the market is quite clear, to anyone who will listen.

A pleasant Thanksgiving holiday to my American friends, and a reminder to the rest of the world that you must muddle through without the direction of Wall Street for the next few days.

How fitting that Thanksgiving was declared a national holiday by Lincoln in the depths of the Civil War, and made official by the Congress in 1941, at the end of the Great Depression, on the cusp of a terrible world war.

And Lloyd [Blankfein], I would not join the many and be happy at all if you took your own life as you have recently confessed that you feared they would. But there might be a cause for celebration if a master of the universe such as yourself would simply take this timeless message into you heart, and make it the light of the rest of your life. That is the right pricing of risk, the proper valuation of all that you are.

“Come, let us sing to the Lord; let us make a joyful noise to the rock of our salvation. Let us come before His presence with thanksgiving; let us make a joyful noise to Him with songs of praise. For the Lord is a great God, and a great King above all. In His hand are the deep places of the earth, the heights and strength of the hills. The sea is His, for He made it, and His hands formed the dry land. Come, let us worship respectfully, let us kneel before the Lord our Maker. For He is our God and we are the people of His pasture and the sheep of His hand. Now, if you will but hear His voice.” Psalm 95

No time for despair, now is the time to be surprised by joy.

“I do not think of all the misery, but of the glory that remains. Go outside into the fields, nature and the sun, go out and seek happiness in yourself and in God. Think of the beauty that again and again discharges itself within and without you, and be happy.” Anne Frank

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    1. Houghtie

      Saw an great article by Martin Wolf. Fiat means “let it be”, hence the term of goverments letting fiat currency be accepted for tender. He argued that many things have been used as legal tender (money) even shells. He argued that gold is really just a fiat commodity, that other than use in jewelry has no real commercial use (except from one or two minor industrial uses). Gold only has value for two reasons, its rareness and its history.

      There are other much rarer commodities, look at Rhodium, which has more industrial uses and is a lot rarer, but is comparatively cheap.

      Gold only has value as people assign it one. It also costs money to store and therefore has a negative income. It is used to “speculate” against currncy debasement and inflation (which are probably very similar things in reality).

      I would hold gold but only speculatively.

    2. Houghtie

      BTW, author “When the currencies of the US and Europe are debased by the financial engineers for the sake of the banks”. I think you will find that the ECB has a much different aproach to management of monetary policy to the Fed. I remember the US hectoring the EU about their lack of rate cutting after the dot com burst (e.g. Europe, you are not pulling your weight on growth … ).

      The Feds ideology is shaped out of the great depression (support jobs market as well as target inflation), this is a responsible to the debt deflation of the 30s.

      It could be argued that the ECBs ideology is shaped more from the German experience in the early 20’s of hyperinflation.

      Unfortunately the worlds reserve currency is the USD and a large chunk of its GDP is still in the US. There is so much inter relationship between economies now that some of the US and UK policies are bound to leak out elsewhere.

  1. reason

    Where is that Midas story when I need it?

    Sorry, this whole story is just silly. Gold is only a store of wealth as long as somebody else wants it. And they do create more of it, everyday they dig up lots of it. Next week they might discover a new Johannesberg. Why don’t you make the same story about land?

    And if governments want to confiscate wealth, well they can just confiscate it. (But robbers can do that as well.)

    And a problem with this story, is of course the problem of hoarding. If gold is the only money, and everybody wants to increase their holdings of it, then the rate of circulation can fall to levels that create severe deflaton. Inflation is not the only danger.

    1. Daniel de Paris

      “And a problem with this story, is of course the problem of hoarding. If gold is the only money, and everybody wants to increase their holdings of it, then the rate of circulation can fall to levels that create severe deflaton.”

      Thanks for the joke! And a good one. You are teaching us XIXth century economics. Welcome to the XXIth….

      The current sitution is a “credit crunch”. Why ? Because the world is plagued with wreckless OECDE baby-boomers over-consuming till death. On credit. China SOE over-investing ditto. And massive public deficits everywhere. Or nearly so.

      In front of zero-interest rates monetary debasement, may us hope gold may teach restraint to a few. Not a bad thing in these mad times.

      Economics originates from the French word for savings. Yes effective resource allocation. This world has to learn. Eve

      1. ploigos

        To Daniel de Paris:
        Well, actually economia originates from the ancient Greek word economia which is a composite word (ecos+nomos), meaning the law of the house,the establishment. With all these banksters and financial terrorists on the loose all these arsenists around, the house, the establishment is on a wild fire. And the end of fiat money is a reality once more, this time it seems for good. Exit anywhere?

    2. Glen

      Reason, gold production has been declining by about 1 million oz’s a year since 2000 so we can’t simply dig more up. To make matter worse, the quality of ore bodies are also in decline. The CEO of Barrick Gold recently described the situation as “peak gold” and we’re now in

  2. vlade

    Govt’s can confiscate gold as easily as they can any cash – assuming willing police force and army.

    In a case of total society breakdown cigaretes, ammo and canned food are more valuable then gold (see Serbia & former Yugoslavia in general in 1990s for a recent example).

    So case for gold sort of assumes financial breakdown but govt unwilling to go the “make it illegal” route (which would not lead to civil war unless a very large portion of the population had its wealth invested in gold – unlikely).

  3. reason

    Of course there is another severe problem hidden in this story. Economic instability comes mostly from the problem of people trying to earn today and spend tomorrow. But they can only earn today what people spend today. The financial system cannot always solve this dilemma. Thinking that gold is an absolutely safe store of value doesn’t solve this problem. If there is a severe famine, gold reserves can disappear pretty fast. You can’t eat it.

  4. GYSC

    I would argue BIDU/GOOG/MSFT/Miami condos, etc are “only a store of wealth as long as somebody else wants it” which is true of any asset anywhere. I would argue that, but it should be clear enough without argument. Of course the Romans never traded Phoenix condos, but you know.

  5. somethingnew

    It saddens me that I must un-subscribe from this blog, after a couple of years of reading it almost daily.

    Yves’ posts used to be (2007-early 2008) unusually prescient and unique in their views on the housing bubble, the alt-a/subprime mess, and the financial crisis.

    Unfortunately, this blog has become increasingly paranoid and political, echoing the same tired, agenda-laden, anti-establishment rants that you see across the internet.

    Will gold keep going up? Probably; there’s enough panic and bubble-cheering goldbugs to let the run last a while longer. However, I don’t need to read the same silly arguments over and over again as to why to hold this non-wealth-producing metal.

    Best of luck with the book deal.

    1. maff

      “I don’t need to read the same silly arguments over and over again as to why to hold this non-wealth-producing metal”

      I take it that you prefer non-wealth-producing paper.

    2. TC

      Just curious: Is holding US dollar now wealth-producing? I know that if you hold gold and gold price goes up, wealth is generated.

    3. attempter

      agenda-laden, anti-establishment rants that you see across the internet.

      Just yesterday I mentioned the Status Quo Fraud, and here’s a living example in the wild.

      According to it the establishment, of course, has no “agenda”.

      However, I don’t need to read the same silly arguments over and over again as to why to hold this non-wealth-producing metal.

      Hmm, personally I’ve heard enough of the same silly arguments over and over again as to why to hold this non-wealth-producing finance sector. And non-wealth-producing “establishment”.

    4. Doug

      Your thought process is exactly why I feel gold can’t possibly be in a bubble. When people such as you begin to understand the purpose of gold and start to buy then we might head into bubble territory.

    5. reason

      I’m inclined to agree – but this post is not from Yves. But why Yves chooses to have goldbugs share the site is a bit of a puzzle.

    6. Captain Teeb

      “Doesn’t pay interest or dividends” is one of the usual arguments against holding gold.

      Putting aside the question of current interest and dividend rates, where do we get the idea that any asset is supposed to magically multiply itself without risk? Sure, bonds pay interest, and stocks may pay dividends, but there is risk in these assets, even in ‘risk-free’ government bonds. The waking of the gold price is a proxy for the world’s waking up to market risk, counterparty risk, and even sovereign risk.

      Gold is not comparable to ‘investments’; that’s the whole point. It doesn’t have a ‘use’, or it would be used up eventually (like smoking cigarette ‘money’ in prison). It is the super-commodity and, as such, a proxy for all things tangible.

      Paper commitments depend on the behavior and credibility of the guarantor. As a group, guarantors are looking foolish, feeble, and self-serving. The times when gold is the best asset to hold are generally evil times, and the rising price reflects a rising consensus that those times are upon us.

  6. Moopheus

    Personally, I plan to increase my stocks of rice and lentils. If the financial system really does collapse and our money becomes worthless, then having food will be better than having gold.

    1. Jesse

      If that works for you, then that might be a good idea.

      I have a friend who swears that the best investmet is Ivory soap. I kid you not.

      I like wealth that is a little more ‘portable’ and fungible, and a little more liquid to unload if things change.

  7. Jesse

    Governments cannot ‘create’ gold, it takes labor to find and extract it. And even then, it remains rare and a relatively stable supply. This is why it has ‘worked’ for thousands of years, as Bernard Baruch famously observed.

    The ‘land’ argument is facile. Yes it is ‘stable’ but there is a lot of it. And it does get monetized, and good land has more value than bad. But land is not particularly portable, and some might say conspicuous..

    Yes a new find ‘could’ happen. And Martians could land tomorrow and bring us oil and cotton candy. But this is not a plan, and hardly a probability.

    Yes, the government can confiscate private property by force. Economics presume some sort of markets exist. If there are none, if there is no regard for private property, if there is a ‘total breakdown of society,’ then all valuation is arbitrary, and might makes right. If this is your outlook, then find a bunker somewhere and stock it with canned good and weapons. And wait for those more powerful to come for you in your pathetic existence.

    But those who make this argument have no real knowlege of troubled times except via the movies and their imaginations. If one is looking for a portable store of value, then gold is always a choice, especially in risky and unstable situations where the government is undergoing change. The examples are numerous. Russia and Argentina come to mind. I have seen it first hand. It makes an impression. Germany in the 1920’s is a fine example.

    I think I understand what is valuable and what is not. I am merely trying to share that with some who may be wise enough to prepare.

    And for those who think they will take their guns and do whatever they wish, and take whatever they want when the time comes, well, they will find out how hard life can be to those who act willfully.

    Life is a school of probability. And crises bring that lesson to bear, with a vengance.

  8. jesse


    “Governments can confiscate gold as easily as they can any cash.”

    Absolutely untrue. A government can debase the currency quietly and by its own volition, through inflation, with the greatest of ease, and unrecognized by the many even while they do it for years.

    if you do not understand this, you understand nothing about money and value. it is a basic tenet, so simple that it takes almost an act of will to deny it.

    If you have value on a promise, your wealth is absolutely contingent on the counterparty.

    Gold is not contingent, except to a willing buyer, and you can pick who those might be. That is diversity in portfolio.

    1. old european

      There was a (more or less) confiscation in 1933 in the USA: see e.g.

      Some quotes:

      ‘Under the Trading With the Enemy Act of October 6, 1917, as amended on March 9, 1933, violation of Executive Order 6102 was punishable by fine up to $10,000 ($166,640 if adjusted for inflation as of 2008) or up to ten years in prison, or both.’
      => ‘Trading With the Enemy’ sounds like demonization of gold holders

      ‘The order further permitted any person to own up to $100 in gold coins’
      => not that much even in 1930ies terms

      Could happen again, don’tcha think ?

        1. Jesse

          The government can also order you to get in a boxcar for deployment to a resettlement camp in New Mexico.

          The US took the actions it did in 1933 based on the gold standard, and the fact of gold being integral to the money supply, which is no longer the case. It also prosecuted NO ONE under this act, save one person who made a point of challenging it in court.

          Can the US seize private property again? of course it can. But then they can also seize your 401k’s and IRA’s and do quite a bit more.

          Silly arguments all, really.

          1. Jesse

            Oh, and if you read the section on that link “The Law Today” it is obvious that the professor is a bit eccentric to say the least.

          2. vlade

            Is it silly becasue it contravenes your belief or is it silly because of???
            Of course they can seize 401(k) or cash – which was my point (and I understand very well that govt can print cash, thank you very much and can’t print gold – or rather they can, but due to the cost and radioactivity of the product it’s unlikely to catch on).
            Gold is held by much smaller part of the population, which can moreover nicely be accused in a populist movement.

            Moreover, if you move to gov’t supported gold standard, you’re still facing problems (and, under most modern gold standards holding physical gold other than jewelerry was illegal), not least of them being that with 99% probability you’re going to move to computer-gold anyways (as opposed to physical gold currency used for all transactions). There’s nothing there to depreciate the currency or divorce yourself from the gold again – in fact, it’s almost given.
            I’d bet money that no current gov’t and few conceivable ones would let private money stand (and private money have their own problems)

            Looking at history, gold standard always failed (currency got debased, govt abandoned the standard etc..). In fact, just about any currency we had in our human history failed, because it’s just too inviting and pays too well to defraud it.

            Gold standard has number of advantages to gov’t backed currency, but also a large number of disadvantages. Unfortunately, people tend to see one or the other, and ignore the opposite.

            What fascinates me in the euro-area gold bugs is also that they hate EUR and love gold, even though EUR has one common thing with gold – no single govt’ can print it. ECB is NOT a gov’t institution. See Ireland, Greece and Spain for examples where the gov’t would love to print money but can’t.

            If you think that insistuting gold standard will stop profilgacy, I invite you to read history books, with particular attention paid to Luis XIV, Spain, fall of Italian banking houses, reason why Fuggers withdrew from banking etc..

  9. Jesse

    One parting comment before I leave for the holiday.

    I am not making a purely theoretical argument.

    One should recall that I am explaining what is happening now, and has been happening since 2001. If you do not accept that a long term trend like this is happening, well, denial is a powerful narcotic, but with severe symptoms of withdrawal.

    the trend will continue until the Fed raises interest rates to a real positive return.

    1. bob

      The trend will continue until the market as a whole EXPECTS the fed to start raising rates.

      The fed does not have to actually raise rates, it just has to use what ever credibility it might have left to make everyone believe they might.

      If this expectation of raising rates ever does occur, the rush to the door will be quick, and it will most likely precede the fed actually raising rates.

      All bennie has to do is come out tomorrow and say that he might raise rates to crush the gold market (stocks too?). It has happened before. Be careful.

        1. Jesse

          all the chinese have to do tomorrow is say, “We’re dumping our Treasuries, and as a matter of fact, have hedged most of them.

          all that JPM and Citi and BoA have to do is say, we are bankrupt, insolvent, and going Chapter 11.

          Be careful. lol. life is a school of probabilities, and you paint phantoms for economic illiterates.

          if bennie came out tomorrow and said that about interest rates, the stock market would go down in flames and the banks would fold.

          But it would fit the wet dream of a handful of badly informed deflationists, probably doomed to darwinian extinction like stolid communist party members in Moscow demonstrating for a return to the good old days in 1999.

        2. Albatross


          When you make comments like that, you are the one, who loses his credibility.

          Gold is as good as anyone believes it’s worth(!), just like the whole capitalist system based on. However, you also need to note that most gold demand by jewelery sector (its major end user segment) has disappeared. And where do you think this gold demand basically comes from: mostly speculative hedge funds, ETFs and by gold bugs such as yourself. Hey, I always appreciate your insights and this is how you play against debasing currency. But please don’t underestimate the world’s major CBs power.

          Enjoy your Thanksgiving.

          1. Jesse

            Please do not underestimate that your conception of what is ‘normal and customary’ may be somewhat contrained by your particular circumstance and experience.

            And the world’s most powerful CB is rapidly not remaining the world’s most powerful CB, because it must send first Timmy and then Obama to beg the chinese to keep it afloat.

            And yet, all is not relative, just a matter of government diktat at the point of the gun, figuratively speaking.

            People resist, seek freedom, precipitate changes. Americans have lost sight of this fact even in their own history.

  10. i on the ball patriot

    Perception is rallying because …

    It is evolutions balancing force for deception.

    Deception is the strongest political force on the planet.

    Thanks all for a great blog!

  11. TC

    “This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”

    Great truth!

    I am curious though whether China’s undervalued currency so that more of its product could be consumed by the Americans is a greater sin than the incessant printing of dollars by the US to confiscate wealth?

    1. Anonymous Jones

      Truth? “Confiscation” depends on perspective. If you do not recognize the legitimacy of a society’s property rights or its a priori distribution of wealth and property, then redistribution is not “confiscation.” Let me assure you that at a basic level, whatever material things you have, you have them because others have allowed you to have them. Jesse is eloquent in describing “what is happening now,” but let’s not get carried away and term Greenspan’s hollow ideas anything resembling a “great truth.”

      1. Andrew Bissell

        Let me assure you that at a basic level, whatever material things you have, you have them because others have allowed you to have them.

        Yeah, and I suppose “at a basic level” all the cities of the world exist because the kinds of people who chuck rocks through windows have kindly refrained from dynamiting them out of existence. Whatever planning and imagination and labor it took to build those cities, we should credit their entire existence to the forbearance of people who would otherwise wish to destroy them.

        There needs to be a term for this shabby pre-rational idea that there’s not really any kind of thing as property rights because back in the caveman days someone could come and club you over the head and take your stash of bananas. “Crass Nietzscheanism”?

          1. Anonymous Jones

            How exactly is that “well said?” Color me confused to the utmost. I’m simply describing the world as it is. I’m not pontificating as to how I wish it were, or how I desperately want to believe it is.

            The rest is not directed at Jesse…

            I have simply stated that while “property” is not a social construct (duh…I was speaking about property “rights,” not property), the acceptance of ownership of property is solely as one is willing to take it. This is definitional, not opinion-based. I would love to live in a world where people respected Lockean property rights (as much as I would also love to live in a world where supermodels thought I was attractive). This is fantasy. My comment was not a primer on what it takes to make it in the world where one accepts the status quo (I’m fully with Jesse on that one), but an investigation into what it means to be an “owner.”

            You want to get into a debate about primogeniture or zoning regulations or the rule against perpetuities? Seriously? Only the ignoramus believes he “owns” something outside of society’s willingness to accept his rights to do what he wants with what he “owns.” I could cite ten thousand other examples if I had the time or the interest. The thinking man understands that the flow of commerce is more subtle and varied than that. The uninitiated believe in absolute “ownership.” We’re all renters, whether you want to believe that or not. That doesn’t mean that you shouldn’t aspire to consume or acquire all you can while you can, but seriously, have a deeper perspective for just one tiny moment while you visit this blog. I have a inclination that you and I will both be dead and forgotten a lot longer than you can probably imagine right now.

            In all events, believe what you will. As will I. Our opinions do not change the truth. It is not like some Heisenberg uncertainty principle under which our opinions will change the ultimate truth of the universe. The truth is what it is, no matter what I believe or what you believe. The difference between me and my opponents is that I openly admit I have no monopoly on the truth. Having said that, anyone who doesn’t understand that the rights one has with respect to property are only as good as the powerful are willing to respect doesn’t merit an honest debate. One could also argue about the axioms that underlie arithmetic. All day long. It is, in my opinion, a waste of time if one ever aspires to argue about the complex and subtle issues that Jesse is discussing.

        1. attempter

          There needs to be a term for the kind of ignoramus who thinks Nietzsche’s philosophy has anything whatsoever to do with economics.

          I guess some people aren’t confident enough in their own ideas to just express them without bringing in some big name they’ve clearly never read but about whom they’ve vaguely heard false things.

          And then a comment like this encourages the next anti-intellectual, and so on.

          What term should we use for that: the “chain of ignorance and slander”?

        2. attempter

          Yeah, and I suppose “at a basic level” all the cities of the world exist because the kinds of people who chuck rocks through windows have kindly refrained from dynamiting them out of existence. Whatever planning and imagination and labor it took to build those cities, we should credit their entire existence to the forbearance of people who would otherwise wish to destroy them.

          I think it’s more like, the people whose land and labor was stolen to build something then refrain from using that dynamite.

          But I guess in your ultra-hyper-mega-pre-rational world, we’re reborn naked and innocent each and every morning, so of course our property distributions can’t possibly totter atop a tower of crime.

          1. Costard

            And people die or are killed, species go extinct, good ideas go unheard – perhaps you have a master plan for these injustices, as well? What gives you the authority to set aside rules other men should follow? You are better? Smarter? Show me a thief or a criminal or even a tyrant, and I’ll show you someone who believed himself entitled, justified, enlightened… just – like – you. Why is self-criticism held is such low regard in places such as this? Why this competition to see who can piss on society quickest?

            The OP was spot on in his reference to Nietzsche.

          2. attempter

            What gives you the authority to set aside rules other men should follow? You are better? Smarter? Show me a thief or a criminal or even a tyrant, and I’ll show you someone who believed himself entitled, justified, enlightened… just – like – you.

            I certainly have a right to “set aside” rules other men made up when even they don’t follow them, and never intended to follow them. Like the moral and legal prohibitions against robbery. By that I mean, I have a right to defend myself against criminals even if they’ve legalized themselves.

            Or, to put it differently, if I had the power I’d certainly have the moral right to impose judgement upon them based on their very own rules which they never imposed upon themselves.

            Why this competition to see who can piss on society quickest?

            I don’t know. Ask those who started it. Ask yourself. I never asked for it. I want to re-establish society where the criminal economic Hobbesians have left just a smoking crater.

            We certainly no longer have a “society”, just a corporatist free-fire zone. Because of the likes of you.

      2. DownSouth

        Anonymous Jones,

        I normally agree with most of what Jesse writes, but on this one I’m going to have to throw my hat in with you. I think your perspective comes from the fact that you’re an attorney and, maybe you’ve seen firsthand just how capricious the law and property rights can be?

        Property rights are purely a social construct. They are whatever the people, or in a totalitarian regime whoever happens to have the monopoly on violence, say they are.

        Gold can be confiscated overtly just like currency can be confiscated by slight-of-hand. Inflation may be a little more politically palatable than overt seizure or taxation, but that difference in political difficulty is the only difference, and is not really all that difficult to overcome.

        Those who endlessly parrot their hallowed “property rights” are either reactionary or haven’t thought things through very well, as this passage from Hannah Arendt indicates:

        None of the European parliaments was a legislative body; they had at best the right to say ‘yes’ or ‘no’; the initiative, however, or the right to act did not rest with them. No doubt the initial slogan of the American Revolution, ‘No taxation without representation’, still belonged in this sphere of ‘limited monarchy’ whose fundamental principle was consent of the subjects. We have difficulties today in perceiving the great potency of this principle because the intimate connection of property and freedom is for us no longer a matter of course. To the eighteenth century, as to the seventeenth and before it and the nineteenth after it, the function of laws was not primarily to guarantee liberties but to protect property; it was property, and not the law as such, that guaranteed freedom. Not before the twentieth century were people exposed directly and without any personal protection to the pressures of either state or society; and only when people emerged who were free without owning property to protect their liberties were laws necessary to protect persons and personal freedom directly, instead of merely protecting their properties. In the eighteenth century, however, and especially in the English-speaking countries property and freedom still coincided; who said property, said freedom, and to recover or defend one’s property rights was the same as to fight for freedom.
        –Hannah Arendt, On Revolution

        1. Costard

          Property is not a “social construct”. It is an extension of a man’s right to his own person, without which society – a derivative of the Latin “companionship”, more or less – cannot exist. When one individual is placed subordinate to another, or one group to a second, you do not have society but forced association. If you desire this, fine, you’re in vast company. But do not expect men to volunteer for it, and don’t waste your time attempting to argue people out of their own self-interest. In the end you will need guns.

          1. Jesse

            The words ‘reductio ad absurdum’ come to mind.

            Yes, at some level nothing has value except what a person pointing a gun at your head might tell it is at that moment.

            Of course, uless your ame is Mohandas K. Ghandi, and you are dedicated to freedom and truth. and then you can shake an empire.

            but, again, taking things to extremes is no probable course of argument, is it? Because then you can twist an argument to any case, as most of us learned in high school.

      3. DownSouth

        And Anonymous Jones,

        You gotta love the dilemma Greenspan poses for the hardcore libertarians, because he’s truly one of them, and he’s such an unmitigated loser.

        They stand ready with tar-brush and gold leaf, but can never quite make up their mind which one to use.

        1. Andrew Bissell

          He poses no dilemma whatsoever. He ran a central bank which fixed the price of money and used government backing to shove bad credit into the economy for over 20 years.

          Greenspan has as much relation to libertarianism as I do to Genghis Khan.

      4. Cool Head

        1. If you look at Gold prices versus the S&P 500, you will find Gold has given an annualized return of 30% over 10 years, unlike the S&P 500 which has more or less given hardly any returns over the last decade, unless you were prescient enough to only sell on all highs and buy on all lows
        2. If you plot the amount of Gold needed to purchase a quintal of rice or wheat or corn over the past 100 years, you will find it has remained constant.This is why Gold is called as “Real” money.

    2. Jesse

      The greatest economic sin is on the politicians who allowed the Chinese to do what they have done, starting with Slick Willy and his cronies in Arkansas.

  12. tgmac

    If I owned all the gold in the world, would I be the richest human on earth? No. Gold, like paper money, is only worthwhile when it can be used as an intermediary between parties for the trade of useful goods. If I owned all the gold, traders would find another intermediary in order to facilitate their trade. My gold would be mostly worthless bar its industrial uses and as a fashion accessory indicating fleeting status.

    At best gold is a fetish (assigning inherent value divorced from any utility value) with historical pedigree.

    1. Jesse

      Arguments from extreme improbabilities (if I owned all the gold in the world) are silly.

      If you only owned all the dollars in the world, you could roast marshmallows.

      1. Dave Raithel

        I take it as settled that the quantity of gold needed to actually use gold money does not physically exist. So we’re always talking about paper money backed by gold, and so a rate – so many dollars per ounce – set by a political authority.

        What makes that authority more virtuous than central banks who “debase” money and steal wealth with paper? Couldn’t such a political authority raise or lower rates as it determined? Wouldn’t people owning gold directly benefit if the authority raised rates (as they do when the “market” will pay more)? That would suggest the political authority has to “own” all the gold.

        Once upon a time many years ago when trying to learn to think like a goldbug monetarist, I asked a proponent this question: If the quantity of gold is held constant, the rate is unmoved, but the real economy grows – good weather, demographics – for whatever reason its bigger – then don’t prices have to drop? And I was told: Well, of course ….

        Show of hands: Who’ll cut your price first? Right – you go first.

        None of what I suggest here assumes “extreme improbabilities.” Any actual effort to get us back onto a gold standard would have to address them.

        I really do try to get my head around what goldbugs want – I really did download the Reisman text put here a few days back in the chartalist exchanges. Austrians are fun to read because they’re like Marxists reflected in a fun house mirror – I recognize all the parts, but man, there’s something disturbingly alien in the image. It’s as peculiar as people exchanging their gold for worthless, debased dollars…

        I don’t get it.

        1. David

          Sure, the amount of gold needed does exist, at some price of gold. And if gold becomes the only thing people will take as money, its price relative to other things will go (way up) to that price.

      2. tgmac

        Arguments from the extremes are valid posits to test the inherent logic, or lack thereof, of a theory. Gold, bar the human labour and capital equipment required to extract the metal, has in and of itself limited utility uses and so limited end use value to economic actors. It takes on an abstraction of value when it is used as an intermediary between traders for the exchange of goods. It does, however, have an historical pedigree as a value store recognised across many diverse cultures, and hence its continuing desirability. To try an argue a huge or even variable inherent value divorced from exchange uses, or limited indusrial/status symbol uses, and thereby tie it to some sort of stable monetary exchange regime doesn’t stand the test of logic nor of practice. It displays all the tendencies of uses of modern fiat currencies, except that it is a naturally limited commodity which takes time and effort to extract and physically store.

        Whilst my original example was an extreme refutation of your argument, I’m sure you’d recognise the marginal propensity to hoard gold as a value store through the daily exchange of goods and services would create its own value flucuation problems. Afterall, gold is not an inexhaustable commodity. As successful business people accumulated paper money backed by gold, or gold itself, this in turn affects the exhange rates of commodities for other commodities as the successful people in effect hoard, while at the same time creating a distinct market for the metal itself due to its increasing limited availability via hoarding. It, like fiat currency, still disengages exchange values of goods and services from the intermediatary of money in whatever form it takes.

        I believe in some pre-revolutionary American colonies, who were very short of gold, provided script to be used almost exclusively as a mean of exchange. If, after completion of a large’ish capital project, they found they had too much script, they destroyed it. Their aim wasn’t to create a market for money but to use it solely as an intended means of commodity and services exchange. When money loses, to some degree, its primacy as a store of value, all people are by necessity required to keep producing goods and services as a means of survival through trading their goods and services. When money, or gold or any means of exchange, in and of itelf becomes the primary means to merely store value, it at best distracts from producing real goods and services for a community as people become desirous of speculating on value flucuations rather than producing and trading.

        [As for disparaging commentary on anyone who doesn’t wholely or partly agree with your thesis, I shalln’t be losing any sleep; nor will I bother engaging again.]

        1. Jesse

          Your argument was facile and misleading.

          There is no other way to wrap it.

          My respose was civil and to the point.

          Nice try.

  13. Knute Rife

    Two points that may be considered to be from opposite ends of the line:

    First, I believe it was absolutely correct that the US went off the gold standard and backed the USD with the whole economy, saying “The USD has value not because we have gold in a vault but because you can use it to buy timber and steel and refrigerators.” If gold had remained the sole basis for currency, South Africa and the Soviet Union would have had the top two currencies for years, and now Peru, Indonesia, Uzbekistan, and Ghana would be top tens.

    The currency problem did not arise from changing to a new standard but rather from changing the new standard itself. The US went from, “You can use your paper dollars to buy this ship we just made” to “You can use your paper dollars to buy this security we just made.” “Paper for steel” became “paper for paper”, and the currency started to slide.

    Second, while gold itself is solid, much of the market for some time has not been real gold but exchange traded gold, and I would submit that ET gold has become a psychological fungible for real gold. I would further submit that this has in fact provided an avenue for “financial engineers” to manipulate gold prices. And I would even go so far as to submit that this is why, for several years up until very recently, gold prices seemed to move with major currencies instead of against them. Because ET gold is really just a piece of paper supposedly representing a certain amount of gold in a vault. Which is what paper money originally was.

    Given this manipulative element that has been injected into the market, how stable is gold? And then there is always the little problem that you can’t eat, live in it, or shoot somebody with it, and if the bottom really falls out, those are the things that will matter.

    1. Jesse

      I do not believe the US should adopt the gold standard.

      The US should grow its money supply at a rate consistent with the growth of its productive economy.

      The point that the Austrian school makes, I think correctly, is that no government has ever been able to do this, because they always succumb to the temptation to debase their currency.

      Once again, the extreme argument. own guns and food.

      How about guns, food, and something for a higher probability outcome, a little more liquid based on historical probabilities?

      1. Dave Raithel

        Well, ok, then you’re not advocating a political economic policy, but offering friendly investment advice …?

  14. Charley


    Everything you said in this article was right last week, last month, and last year…

    So what changed?

    1. Jesse

      The trend continues.

      Markets do not move to a new equilibrium overnight.

      The central banks resisted this by selling gold at key intervals repeated over the past ten years.

      The central banks have become net buyers again, for the first time in many, many years.

      That is what has changed. The tide is turning. The dollar regime is changing.

      I hope that helps.

  15. mg

    Who cares? Really.

    Trade your fiat currency for gold, silver, commodities, guns, bullets, rice or beans. Whatever you end up owning is worth more than a depreciating currency. Double if it is imported.

    Remember the many stories of collapsing economies where the people would take their paychecks and buy anything real as quickly as possible before their paper would devalue even further.

    Gold is a store of wealth that has questionable utility in an uncertain future. Buy it or don’t, just quit proselytizing in every comment section related to finance.

    1. Jesse


      I share you annoyance with comments.

      This is why I do not allow them on my blog.

      Yours is particularly lacking in content.

  16. maff

    I like Jesse’s writing as much as everyone else here but this graph is hardly a fair comparison. Gold has gone from $40 in 1970 to $1200ish today. This works out at about a 9% gross return. Subtract CPI from this and… well, you have a curve that probably looks a lot like the blue one but displaced up by a few %. This would be a more honest comparison. Lets keep it real.

    1. Jesse

      But that is not the point is it?

      The point is to show gold rallying at the times when the interest rate goes negative. It was not to show the real return of gold since 1970.

      Your comment is off the mark.

  17. Andrew Bissell

    One should recall that I am explaining what is happening now, and has been happening since 2001. If you do not accept that a long term trend like this is happening, well, denial is a powerful narcotic, but with severe symptoms of withdrawal.

    In 2001 one could have written — and many did actually write — this exact same paragraph about gold’s 20-year bear market. In 2008 you could have written it with oil at $140 per barrel. I’ve studied enough charts of commodity blowoffs to know better than to stand in gold’s way until the trendline of these exponential price gains is broken. But it is a lazy argument to dismiss those calling for an interruption in gold’s upward climb as being in “narcotic denial” simply because they don’t look at a chart of the gold price and say it has to keep going up and to the right.

    1. Jesse

      No, but there are people arguing all sorts of reasons why gold should not be rallying, why it has no value, but it is and it does.

      I am attempting to explain it, what has preceded on the chart, the reasons why. They have to at least recognize this, and from there proceed to an understanding of WHY things happen, and their validity as fundamentals.

      Then you can judge what happens in the future, not in the short term but as a trend, from there.

      Hardly a lazy argument and your criticism seems unjust.

    2. Jesse

      You see, Andrew, that is what is known as the scientific method.

      Something is happening and you seek to understand why. You examine the data and create hypotheses.

      On the other hand, there is the kind of reasoning that argues top down, that says that things cannot happen because of x and y as first principles. Then they quickly degenerate into ad hominem attacks.

      Gold is rallying in a very sustained trend. One seeks from a fundamental standpoint to discover the ‘why.’

      There are those who say it will not continue ‘because’. Because it is dumb, because it is a fetish, because they don’t want it to be, they don’t like it, because something might happen exogenously and improbably.

      They say this not because they have reasoned it, but because they do not own any, and are afraid and pissed off.

      I don’t care if someone does an analysis and can say why and why something might happen in the future. But stubborn denial of what is happenning is indeed the narcotic of denial, the kind of thing that causes people to stay put when the tides of history are rolling over them.

      Most people do not operate on this level. They think in sound bytes, in pictures of barely understood concepts, of group think.

      Well, good for them. But the tide is coming in, and its rising high before it is done.

      1. Andrew Bissell


        I suspect we’re in much more fundamental agreement about gold than you might think. It’s over 20% of my portfolio now (helped along by some deterioriation in value of the long-term index puts)! And I loved your takedown of Willem Buiter’s silly, fiat-partisan denial of gold’s value. Gold is most assuredly money.

        But the dollar is also money, at least as long as there are massive debt liabilities denominated in it. I believe the forces of deflation are going to prove much more powerful than almost anyone imagines. I’m in Robert Prechter’s and Hugh Hendry’s camp — it’s not that the central bankers don’t *want* inflation, but after using credit to create it for so many decades, they’ve finally rendered themselves (temporarily) impotent to get it going again. “Free” money (i.e. loans at 0%) and some small asset purchase programs (relative to the M3 totals) just won’t cut it.

        *After* the deflationary crash finishes playing out, I think gold will be probably be absolutely essential to wealth preservation, given the American body politic’s constant knee-jerk reaction to DO SOMETHING!, the Constitution and political prudence be damned. Those who believe human beings are competent to administer fiat currencies backed by nothing will be rudely instructed otherwise.

      2. Andrew Bissell

        By the way, Jesse, I’m curious to know, what exactly do you mean when you refer to “those who do not believe gold’s trend will not continue”? For instance, I believe gold may be much lower in 2010 or 2011 (say a correction to $500-$600 or so), and much MUCH higher by 2020. On the 20-year chart, a pullback like this would be perfectly healthy and wouldn’t break the long-term bull trend.

        Am I a doubter of the obvious evidence of gold’s bull run to believe something like this could occur? Especially given the metals market’s characteristic volatility?

        1. Jesse

          You are quoting me out of context.

          If you go back and read what I said, especially the part that followed your quote, you will see that my objection is to those who have not reasoned their positions.

          If you think gold will go lower in price, then great, let’s hear the reason. If your reason is that it is no good, it doesn’t deserve to go up, that it doesn’t fit your current mood, well, then, who can respect that?

          If it is just an opinion, well, it has little value to another.

          See the difference?

          I have plenty of reasoned scenarios which show gold lower in the short term, next year. I never know which way it will go. But I do know that the trend is the trend, and gold is likely (as a probability) to go higher while short term US interest rates are negative.

          So, do yo uhave a reason to think this? don’t answer here because looking for these answers is a pain.

          1. Jesse

            Oh yes I see, in a later (earlier) message you believe in a temporary deflation. don’t compare yourself to prechter though. he is not a good forecaster at all. I have little respect for him. He writes his misses in sand, and carves his hits in marble, often shamelessly.

            That is a possibility, the big hit next year. And there is precedent for it for sure, as in a panic liquidation.

            It would have to be a big one, that takes out China.

  18. charles

    “Economics presume some sort of markets exist. If there are none, if there is no regard for private property, if there is a ‘total breakdown of society,’ then all valuation is arbitrary, and might makes right.”

    First, I am glad to see that you recognize that it is property rights that protect gold, not gold protecting property rights as Greenspan wrongly assumed.

    Second, as most of the value is transactional, heavy taxation (say 30-50%) on transactions together with strong capital controls is sufficient to depress the value of gold in a domestic market. Remember gold is not legal tender ! You can’t use it for transactions, that anyway have to be declared for VAT or sales taxes purposes.
    There is no need for a total breakdown of society or property right for this to happen, quite the contrary : never in the history of mankind the organizational structure of the economy in advanced societies has been so amenable to control of commercial transactions.
    Of course, you can try the illegal route, but it will be no less risky than black market on cigarettes or cocaine.

    Third, precisely because gold is rare and difficult to assay, it can only be held by a minority. In a democracy, it means that it will be very easy to find a majority that will think that gold possession is “antisocial” and must be heavily taxed.

    Finally, if you decide to quit your country with your gold (which means jettisoning the very real value there is in the physical property that you cannot take with you, business and private interpersonal relationship, familiarity with the language, etc…) then there is this technology called metal detector that makes it much more difficult nowadays. Again, you can go the illegal route, but you incur the risks quoted above.
    I know that the classic answer is “oh yes, the gold must be stored in a safe overseas”, but step back a minute and consider that if gold is useful only when emigrating, maybe it is a better idea to directly buy assets, such as real estate or government bonds, in your “target” country of choice, where hopefully property rights are respected. This is what rich people really do to protect their wealth against chaotic outcomes. Gold plays only a minor speculative role in their portfolio strategy.

    Oh, and by the way, when heavy taxes for gold will be implemented, John Paulson will already have sold it at a high prices to retail customers because, he, and not them, has the ability to get the information about taxation before others. At speculative games, retail always loose.

    1. Jesse

      “First, I am glad to see that you recognize that it is property rights that protect gold, not gold protecting property rights as Greenspan wrongly assumed.”

      You misconstrue both Greenspan’s words and mine.

      the rest of your comment is no even remotely supported by real analysis and historical precedent.

      For example..

      “…precisely because gold is rare and difficult to assay, it can only be held by a minority. In a democracy, it means that it will be very easy to find a majority that will think that gold possession is “antisocial” and must be heavily taxed.”

      Uh, have you ever noticed that up until 1933 in the US gold and silver were money, as defined in your Constitution, for everyone?

      Now Charles, I ask you most sincerely, how can anyone be expected to take your fantasies seriously?

      1. vlade

        Gold dollar coins were last in normal circulation in 1889. Silver dollars dropped out after 20s last century – that’s why everyone has $1 bills. It was illegal to own bullion for quite a long time, the restriction dropped only after US went off gold standard.
        The reason was precisely so that US state could control money supply and devalue the nominal dollar vs. gold (as it did number of times).

        Ad hominem attacks in your post are not exactly the way to argue either.

        I have to say I agree with a comentator from a few days ago that since Yves started writing her book and is spending less time here, the quality of the blog went down. In “good old days” even the discussion was mostly fact based rather than ideological and ad-hominem attacks (to name two particularly visible in the last few weeks).

        1. slg

          Um…gold _coins_ were in use in the US up until 1933, when Roosevelt recalled them. They weren’t “dollars”–they came in denominations of $2.50, $5.00, $10.00, and $20.00–so-called “quarter eagles,” “half eagles,” “eagles,” and “double eagles.” Holding gold bullion wasn’t made legal for US citizens until 1975–long after the US had gone off the gold standard.

          And silver dollars didn’t finally vanish from circulation till all Ag coins did, in the early 60s. They were in routine use in Nevada up to that time. (I was there and & remember them vividly.)

    2. Ivan

      In addition, the gold market is only a tiny fraction of the market for currencies. Gold gets its value from the fact that it works in a small niche market. It has some value as part of a portfolio of assets. Even in India where everyone hoards gold, most middle to upper class families have their monies tied up in their houses, land, stocks or insurance plans. It is only the poorer classes who have almost all their worldly wealth based on gold.

  19. alex black

    Good article, but I’d much rather read it on Jesse’s blog, with all the yummy food porn on the left.

  20. cfernandez

    Great story! What happens to my reactions if the graph is plotted on (a) linear scale and (b) log scale for Gold and not a Geometric scale. Will the drops on linear scale suggest a drastic drop once the T rate rise?

  21. anon

    talent is the ultimate currency, everyone has it in raw form, most sell themselves out for artifices, and that will be proven yet again when this process is completed.

  22. Andy T

    So, just to be clear Jesse, do you like gold or not?

    Love these diatribes and absolutisms….

    When the world ends (the next time),good luck hawking your gold pieces for food and fuel. Plenty of gold has been found in ruined civilizations.

    It only has value because we ‘believe’ it has value–similar to any other fiat currency.

      1. Jesse

        I think we can stipulate that gold does not confer either invulnerability or immortality.

        Wow, great point.

    1. Jesse


      It is a trend. I am trying to understand it.

      History has voted already. Again and again.

      You need to think why, rather than attempting to justify your own provicial outlook, your current bias.

      It causes something called ‘learning’ to happen.

  23. Trainwreck

    For every industrial use for gold there is another superior metal. Keep jawboning gold, eventually your jaws will grow strong enough that you will be able to eat it. It wont give you much nourishment, say, compared to beans. Which last forever, easy to store, and unlike gold actually have a legitimate survival use.

    As far as the dollar going to zero, think again, the USG will confiscate gold before they let that happen. They did it once before in the 1930s they will do it again!

    Now if Gold were to go to $2000/oz (and it might, at this point it is Vegas odds) then that would arguably put pressure on platinum, palladium and a score of more useful commodities. That would increase input prices for a number of industries which would cause inevitable failures of many players in those industries increasing unemployment and all sorts of other deflationary pressures. That would cause all sorts of credit instruments to default (businesses live and die based on their credit lines). What is the value of the dollar based upon? M1=hard printed dollars + M2= overnight deposits and other accounting identities that matter for a hill of beans + M3=outstanding credit.

    If credit keeps collapsing the value of the dollar will rise, as the false dollars of fictional debt money evaporate.

    1. Doug

      Well, at least I agree with your name.

      You stated “If credit keeps collapsing the value of the dollar will rise.” True, that’s part of the definition of deflation but read the following article (Dec. 2008):

      This is the only article I’ve read that puts it all together in a way that makes perfect sense to me.

      The other metals going up in price are the least of our problems. Besides, platinum, palladium and silver are well off their all time highs.

    2. slg

      “For every industrial use for gold there is another superior metal.”

      This is simply not true. In fact, gold is invaluable in high-end electronics because of its unique combination of high conductivity and utter imperviousness to corrosion under nearly all conditions. The difference between “mil-spec” and ordinary electronics is all the Au used, for contacts and such.

      If gold were as cheap as copper it would be used as widely.

  24. TC


    If you don’t mind me asking: Is holding a basket of metals and/or commomdities more desirable and/or less risk than holding just 100% gold?

    1. Jesse

      I am trying to analyze a trend that is in place.

      I am not giving investment advice, which is what you are asking. That is a more complex question, and one which I do not even attempt to address.

      As you can see, just dealing with simple matters like reality is difficult enough.

  25. bob goodwin

    Oil is the real non-debasable currency of our time. There is simply too little gold to be anything more than canary in a coal mine. The real world is telling us (via oil prices) that inflation/deflation risks are balanced. But all the inflationistas are flocking to gold. As there is a potentially limitless supply of inflationistas against a fixed supply of gold, it might be a nice bubble to join.

    Jesses arguments about the risks of paper wealth are hundreds of years old. This is not to say they are wrong, however the slide from there into gold is a tired slight of hand.

    1. vlade

      I’d make it more generic – energy. To do anything and everything you need energy, which would therefore be the most sensible currency. More energy doesn’t mean inflation (because if you produced something with 1kWH, having more energy won’t stop you from producing it at 1kWH.), a lot of externalities are taken care of automatically (because they cost energy) etc.

      Unfortunately, physical limitations (such as storage) means that oil is probably the best substitute at the moment. That would never work for political reasons though.

      1. Jesse

        Oil is difficult to store, and very volatile in price.

        See, where you are all going wrong here is that you don’t really think about what makes a store of value.

        Why not air? Everyone needs it. Just like oil, but moreso.
        And water? Certainly I would choose air, water, food and shelter over oil?

        Thinking about why things happen, why some things ‘work’ and why others do not is important.

        History has been dropping us some very big hints.

        It is good to take that into account.

        Of course the easiest form of currency is your life. do this or we will kill you. That works. Certainly popular last century.

        but in a MARKET economy, it might be considered a little out of bounds.

        Unless you are a health care reformer in congress.

  26. Kevin Smith

    I suspect that people in the Middle East who previously would have sunk their money into things like Dubai or CitiBank have become disenchanted and are now preferring to hold gold.

    What is Uncle Sham going to do?
    Does anyone care any more?

  27. Charles

    I am not an American, so it is not “my” constitution, even if I like most of its features (but no regrets for the disappearance of precious metal as legal tender).

    I stand by my assertion that it is hard to practically hold gold, and even harder to use it as every day currency.

    Even in precious metal circulation time, most of the circulation occur in small coins (1 dollar was 1.6 gram, 13 or 15 mm diameter). How do one knows it is real gold ? There are very sophisticated counterfeit possibles so you need an assaying process. Good assaying is specialized work, requiring expensive tooling, and time. It is therefore costly to check by oneself (or have checked by an independant trusted party) a coin that one receives in a transaction. It is possible today because the circulation speed of gold is very low thanks to its non legal tender status, but when it is used as a currency, with quick circulation, it is not economical (imagine queuing at the supermarket where every precious metal coin is assayed by the cashier…).
    What happens in such case is that people have to TRUST the assaying instrument makers and/or the mint company that their circulating gold or silver coin is real. This trust usually comes from sovereign entities, and they make you pay a seignorage tax for it. More importantly, sovereign entities trust only their own assessment. It is through this channel that they can enforce debasement : they force to pay tax in the old “valuable” coin, and pay their bills in “new” debased coin. People are stupid, right ? Why don’t they go overseas to exchange their old coins and mint into debased new coins, or keep their wealth in pure metal ingots ? Apart from the fact that it was sometimes considered as counterfeiting, this arbitrage was only available to rich merchants, first because one needs to pay for the cost of setting the arbitrage, second because for the common man there is no time to set it up (old coins had to be exchanged to new coins to buy necessities), third because again the median household doesn’t own enough to justify picking a big fight against the sovereign about it (I don’t think the liquid wealth of the median household is much higher today than in past centuries, and today the median liquid asset holding in the US is about just a few thousand dollars, the rest is mainly housing, an asset that goes up with inflation)

    This is what I meant by “the majority does not hold gold”, it can only hold a few coins domestically, and as a practical matter, it is very different. Check figure 12 in Rogoff/Reinhart paper “This time is different”, and you will see that inflation through debasement can arise without paper money. You wanted real analysis and historical precedent, you have it !

    You may be rich enough to hold ingots or bars overseas and escape the constraints stated above, but don’t fool yourself with the idea that the interests of the majority in democracies are aligned with yours regarding the possession of gold.

    This is why I think capital controls and targeted taxation could very well stand in the way of “defensive” precious metal investments. It is very easy for me to imagine a congress slapping a heavy tax on precious metals transactions and/or profits to pay for a tax credit for say, green energy investments. In a world of dwindling energy resources constrained by global warming, it may seem sensible to discourage energy intensive mining of an ornemental metal, don’t you think ? I would vote for it personally.

    To finish, how about a real life example ? In France, every time gold is exchanged against something (usually money, but you could barter it against any good) 8% of the amount of the transaction is taken as tax, and there are discussions about setting this amount to 16%. The initiative for the tax rise comes from the legislative branch, and it is actually the executive branch (more representative of the elite) that is dragging its feets. Expect some sellers there if this goes through parliament !

    Fantasies ? Hardly.

    1. Captain Teeb

      I’ve lived in Benelux for the last 10 years, and I can say that France is an extreme case with its tax on gold. After the Franco-Prussian war, France had to pay 5 billion gold francs to Prussia. To raise the cash, France put new taxes on land. Does that mean that land was a bad investment?

      I suspect that most French go across the border to buy and sell gold bars and coins. There is no tax on gold in Belgium or Luxembourg (though ingots other than gold are subject to VAT). The Luxembourg daily newspaper publishes prices for the dozen or so most common bullion gold coins on its financial page (can you imagine that in America?)

      In any case, much small business in these countries is ‘in the black’, the local term for cash/no record transactions. I suspect that such would be even more the case if the paper money becomes unusable. My point is that a tax on gold would be easily evaded, certainly in small transactions. That is the point; gold is a fungible, ‘bearer’ commodity.

      As for ‘ornamental’, gold is a valued ornament precisely because of its monetary value. Stainless steel looks great and is more durable, but few wedding rings are made of it.

      By all means, halt all gold mining on eco-principles. That should keep the price down. While you’re at it, why not go short a few contracts?

      1. charles

        “I suspect that most French go across the border to buy and sell gold bars and coins.”
        …for transactions significant enough to justify paying for the trip only… For most French, traveling to Belgium or Luxembourg will entails an expense of 100 euros at least, especially if one includes a day of lost labor. To make it worthwhile, you would have to spend around 1200 euros, a significant sum for the median french household. And if gold is an investment, you will have to make a second trip to cash out…

        My point is that only the wealthy elite of society can enjoy the benefit of precious metals without being subject to seignorage and other taxes.

    2. Jesse

      Fantasies, indeed.

      A sense of history such as this, and in someone who is not a product of the American education system! Is there no hope?

  28. love my shiny thing

    Gold doesn’t really matter unless and until people (the right people) begin to demand that any interest payments due to them can only be remitted in bullion: and actually start seizing debtors’ stuff if it isn’t.

    Otherwise to my eyes it is just another flavor of held risk, this gold, in the never-ending task of choosing the means by which to try to preserve and enhance the value of what we’ve got.

    But the Fed ought not to be making that task a casino-crap-shoot guessing game, with the House holding all of the relevant info Secret,so as to make the preservation and enhancement of value more difficult than it already is: and yet this they seem to be doing with the cooking of the definitions of their publicly-released stats.

    No wonder the “gold flavor” of property held at risk has picked up of late….but the rise is yet 75% psychological.
    And dividends are spendable….

    1. Jesse

      You make a good point, a very good point, about the difference between ‘legal tender’ which I made that Mr. Buiter confounded.

      Gold right now is NOT a currency. Thank you. Why? BEcause it is not legal tender. It is only a store of value.

      so to say that gold is the ultimate currency obvious is a paradoxical statemet isn’t it because it is not now a currency at all!!!! Anywhere that I know of.

      Probably for the first time in economic history of the world. Well, I admit it is since about 1971, but I am talking of the sweep of history here.

      thank you so much for thinking.

  29. drona

    As an Indian, Gold will always be a part of my investment portfolio irrespective of it being in a bear or bull market. A majority of Indians buy Gold as jewellery and not the pure metal. But customs have changed during the past decade as many Indian banks have started launching their own coins or bars for retail investors.

    I would always welcome the majority of people in other parts of the world to be bearish about Gold or its price would skyrocket. I would love my future generations to enjoy Gold as an investment and jewellery.

  30. RN

    Jesse said:

    “Gold is the ultimate currency”.


    First, I own lots and lots of gold. I bought it in 2000 because I thought it would go up in price relative to other assets. Gold is hard to increase the supply of. Gold has given me an early retirement anytime I want it. So I’m a fan.

    But for God’s sake, will these goldbugs stop saying “Gold is currency”? Or “Gold is money?” It’s horse puckey.

    Gold is no more currency than my shoe.

    If I walk into the bank and try to pay my mortgage with a gold bar, they’ll laugh me out on the street. If I try to pay for my Starbucks with a 1/10 oz Eagle, the “barista” will laugh tell me to give him four bucks or give him his coffee back, even though I’d be overpaying him by a factor of 25.

    So, let’s please stop saying gold is “currency”. It hasn’t been for many decades. Gold is simply an asset class, with unique characteristics, like all asset classes.

    1. Jesse

      Owning gold does not make you smart.

      I had ‘zero’ interest in gold until 2000, which is the better part of my life.

      It is a market. A trend. A philosophical concept about the stores of value.

      1. Jesse

        Ok. I will take out the single statement about curency.

        Now at least that someone has recognized that legal tender matters.

        Ok, 99.9% of the essay remains. now what?

  31. Anon

    All the gold ever mined in the world throughout history would fit in 2 olympic size swimming pools.Not much when lots of people want some of it. Sure gold supply increses each year, but no where nearly as much as goverments print money as they are today. Appriox 2500 tons will be produced this year and now that central banks have stopped selling and started buying, there will be 1300 tons shortfall to demand.Lots of shenanigans go on in the paper gold markets, but the fact of the matter is gold was $250 ten years ago, thats almost a 500% increase in price.

  32. Anon

    Also, gold has been a currency of trade for 6000 years,traders and kings used gold as payment between countries on the silk route back in Roman times. Today America,Germany,France,Russia,China and India have substantial amounts of gold in their reserve banks.America, Germany and France have not sold much of their gold reserves despite all the retoric about it being a barbaric relic, while the other three central banks are accumulating it as fast as they possibly can.If gold today bore no relationship to backing currency, why would this be so?

  33. Jesse

    RN and others.

    Gold is the ultimate currency. The reason for this is embodied in the quotes from Hayek and von Mises.

    Yes, the gold standard has not been used since 1971.

    As a percentage of time of organized economic monetary history, that is not a significant lapse.

    I do not advocate the gold standard, as long as gold can be freely traded between nations.

    By the way, how much wheat, oil, copper, and pork bellies do nations hold in their central bank reserves.

    1. Anonymous Jones

      Jesse — Love your posts and your thoughts. But sometimes it’s better to reign it in a little. Gold is not the “ultimate currency.” Gold has certainly acted as perhaps the best and most universal currency for most of human civilization. And you are almost certainly right that it will likely continue to act as a store of value and medium of exchange unlike any other substance, commodity or idea. But no one knows what tomorrow will bring, and thus gold is not the “ultimate” currency in the sense of ultimate meaning “last” or ultimate meaning “best” or ultimate meaning “pre-eminent.” No matter how small the probabilities are that something will come to pass that deposes gold from its throne, the chance still exists that this might happen.

      1. Jesse

        If you understand what ‘ultimate’ means, and the historical context of the history of money in which I say it, then you would not say what you have.

        Why do people have to turn all long term trend analysis into short term tout recommendations? Of course I do not know what will happen tomorrow. I say it all the time.

        did you bother to read the essay, or are you latching on to one sentence and taking it out of context?

        It really is that simple.

  34. Robbie

    Nothing to see here; just another gold-bug fuming at fiat currency.

    “The simulacrum is never that which conceals the truth–it is the truth which conceals that there is none.The simulacrum is true.”
    It does not matter what the “currency” is, gold, wampum, cattle, fiat money or chickens. The search for a better system of money is not what gold-bugs want, they only seek a better return. Which takes to the best statement of this rotten blog entry and thread;

    “Well, ok, then you’re not advocating a political economic policy, but offering friendly investment advice …?”

  35. love my shiny thing

    Why should human productivity be limited in any way by the scarcity of this particular metal, not as relative to any process of production of substantial goods, but only relative to people’s desire for it, their willingness to bid higher for it?
    OTOH what people think about things can on some occasions be more important than the things are themselves, eh? It would seem to be particularly so, where the mere physical needs of bodily survival are easily fulfilled.
    What need did the Aztec or Inca economy have, what use did they make, of gold? Those human societies thought of gold very differently than did the Conquistadors. Something to reflect upon, perhaps. (No pun intended.)

  36. RN

    Jesse said:

    “By the way, how much wheat, oil, copper, and pork bellies do nations hold in their central bank reserves.”

    Um…pork bellies are perishable, and so is wheat.

    Why does Yves let you post here?

    1. Michael

      Well, umm, that was his point.

      Anyway, how rude of you to berate Yves’ choice of guests, it isn’t your site to command. I am sure i’m not the only one who finds a range of opinions more useful than one, particularly in such a complex area with so many gotchas. And in my recent readings, Jesse has probably been one of the most consistently interesting, insightful, and mature reads of any financial writer on the internet over the last few months. Not one to be caught up in conspiracy theories or jump to conclusions about the state of things as so many others have.

  37. Burntout

    It is thanks to you and like bloggers that my life’s savings had a near miss from devastation from the very obvious crony capitalism running naked full throttle since last 12 years.
    To me(a financial ignorant), money is, and will be, a trusted store of future proxy for unit of labor.
    Cant we insert a flat golden band in each paper currency? That way it will be managable and also will not be prone to debasement.


  38. Anon

    The gold story — essentially — is that the rising economic powers of Asia, the Middle East, and the commodity bloc are rejecting Western fiat currencies. China, India, and Russia have all been buying gold on a large scale over recent months.

    Why should that stop when the AAA club of sovereign debtors is pushing towards the danger threshold of 100 percent of GDP?

    These new players account for almost all the accumulation of foreign currency reserves worldwide over the last five years, so what they do matters enormously.

    After crunching the numbers, Mr Jen found that the share of gold in their reserves is just 2.2 percent compared to 38 percent for the Old World (perhaps we should just call them the deadbeats from now on). They would have to buy $115 billion of gold at current prices to raise their bullion to just 5 percent of total reserves, and $700 billion to reach just half Western levels.

    The killer-term here is “at current prices,” since any such move in the tiny global market for gold would send prices into the stratosphere.

  39. Anon

    I get really sick of sites that have one tribe that rubbishs “people”or “bloggers”that supposedly dont belong on the hallowed turf of that – oh so venerable site.Roll on the dark ages.

  40. Paul Tioxon

    I believe this Austrian school of thought, as they seem to identify themselves as, has no theoretical argument that has explaining power or predictive capacity to understand the political economy of the emerging global social order. The absolute need for currency in a modern economy exceeds the supply of gold to be used in distribution for our
    $14t economy, much less than the multi trillion dollar economies of the G 20. The cybernetic function of money, cash in the hands of the population, moving from wages to consumer demand, as monetarist theory alludes, is what has been disrupted by calculated political decisions by oligarchic industrial groups. Yes, finances need to be maneuvered by Fed and Treasury bureaucrats, especially when corporations flood the economy with cash during high employment periods and crash the flow by throwing people out of work. The disruption of the money supply during this credit crunch will not be alleviated by finding stores of value that are rarely used in the day to day operation of a modern economy. If I had to stoop so low intellectually, I would seek the empirical data on ammunition shortages in this country, food dehydrators and can good sales. That should tell us more about currency in times of discontinuity than gold has since the Spanish Empire crashed from over use of precious metals from the New World. Also, look up the use of cigarettes in prison society as currency. There is always the old alternative chestnut, the baby sitting coop chits and the IRS punitive reaction to it. Keep talking about gold, it is a good diversion from talking about pension reform, banking reform and restitution from Wall Street inter alia.

    1. Jesse

      “There is always the old alternative chestnut, the baby sitting coop chits and the IRS punitive reaction to it. Keep talking about gold, it is a good diversion from talking about pension reform, banking reform and restitution from Wall Street inter alia.”


      Your abuse of reason is most discouraging. Really.

      Nice try at a new and high sounding reason for censorship.


  41. Jesse

    Ok, if you look into the comments preceding, you will see that a few bright bulbs figured out that “gold is the ultimate currency’ is a paradox, because for the first time in economic history gold is nowhere a ‘currency’ in the world, if currency is to be defined as ‘legal tender good for all debts public and private.’

    Remember, Willie Buiter challenged that hallmark. did you think I agreed with it? Of course not.

    So, what is gold? It is a ‘store of value.’ A number of people went there.

    Is a ‘legal currency’ a store of value? Is it the best?

    The point remains. What is the market telling us? Why are central banks buying gold now, as opposed to the asset classes you all named? Although of course governments do, store oil. Ammo. Water. People.

    Why is gold rallying? That is a fairly narrow undertaking which I engaged in. Because people are just silly? Was Hayek and von Mises and Greenspan just buffoons? (I speak of the pre-sith Greenspan here).

    What makes gold an excellent store of value such that if we look across all economic history, what would be the largest common denominator?

    yes, governments can say ‘tough’ your money will be as we wish. Hitler said it quite eloquently. the coin of his realm was your genetic makeup.

    but, and this was Greenspan’s point that was so neatly twisted by Charlie boy, gold is as portable, compact and transportable as anything gets, universally valued and accepted, except perhaps the minds of an Einstein or the talent of a von Braun, which most people do not have.

    Think about it in those terms perhaps, and then you might get to the next level.

    1. Jesse

      And although I do not make predictions, but sometimes make forecasts, I forecast that gold, and possibly silver, which be included in the basket of ‘currencies’ that will comprise the new SDR by 2020 at the latest, most likely at the insistence of china and the BRICs, but resisted strongly by the US and the English, even thought the US sitll hold much of the world’s gold, and the developig nations hold little.

      and charlie, if you understand why they will do this, you will undertand why Greenspan said what he did about economic freedom and gold.

      1. Jesse

        Of course.

        The pity is Greenie really did sell his soul, and go against his own ‘principles.’ I am just not sure about the terms of the agreement.

  42. Walter

    He has said that he decided to fight the system from within, rather than from without.

    Did he go native, suffer intellectual capture… probably to some degree… He was in his own words, a regulator who does not believe in regulation.

    I think he only half sold out, he sold out the pricing side of his ideals by stepping on the gas with low interest rates instead of letting the market price itself… but he continued to fight the imposition, and I would argue enforcement, of any rules upon bankers.

    Kind of a worst possible scenario if you think about it, let the greed/fraud side of the market run wild, while at teh same time artifically pushing things on the pricing side… It was the perfect scenario for a kleptocracy wealth grab by the banksters, though I can’t honestly say that I believe he was intending that outcome.

  43. MG


    I get your basic gist (and agree to a point) but lately your posts seem to contain more angry rantings about the evils of “fiat money” that are a bit leaner on facts and actual data. Additionally, you seem to be getting stuck in the same mold as what your criticize others for – having a dogmatic ideological belief and interpreting all commentary & data through this somewhat narrowed prism.

    For example, I agree about some of your basic points in this post about gold. Still, it is awfully lean really hard facts about what central bankers are exactly doing. No mention of what % of gold constitutes their financial reserves, who is selling/buying, etc.

    I would prefer to see posts that are more grounded in fact used to support a conclusion than a conclusion supported by what is largely personal observations/viewpoints. That’s all.

  44. MG

    Jesse – Keep the political ranting to a minimum. You seem to jump all over the place with it and inject it largely arbitrary into your posts and your arguments.

  45. LeeAnne

    “The pity is Greenie really did sell his soul, and go against his own ‘principles.’ I am just not sure about the terms of the agreement.”

    The idea that Greenspan had or has any ‘principles’ is galling. I can’t believe the credence being given his ‘apology.’ He and Paulson are the most pathologically challenged of any two players on the national stage of this or any other country. You didn’t have to gas the population; all you had to do was totally demoralize and degrade them: early retirement; temporary employment; low wage employment, part time employment, dead end- no opportunity for advancement employment, no on the job training employment; go and guess what the next decent paying skill will be and pay for your own training -the crap game society.

    Greenspan hardly behaved in a principled way. As head of the FED he had some responsibility for the welfare of the country (see: people). His concern was to make sure unemployment levels were maintained without consideration for the welfare of the ordinary American citizen. The health and wealth of the ordinary American citizen was and is not the least concerning to him or to his cronies.

    Any idiot knows that if your economic ideology rests on maintaining at least a 6% unemployment rate, something has to support that 6% while they are unemployed.

    Instead we have constant hot air and private prison building and management for trivial offenses to take care of the human resource excess under that system. And, don’t forget that the mentally ill are being housed in prisons without the care required to treat them properly and humanely. If they’d abuse our military men as they have in full view, just imagine what private management are doing to the mentally ill in prisons.

    And, having stripped the country of infrastructure and the means to pay for its replacement and maintenance, we are now all set up for the privatization of everything, including the air we breath.

    Greenspan cannot be forgiven. His crimes cannot be forgotten. He was the public relations man for all the US job destruction of the last 20 years. He provided the political theater, the political cover for that destruction. He can rot in the 9th circle of hell for his crimes against US humanity as far as I’m concerned.

    We are the consumers the Chinese have been so dependent upon. We didn’t need all that cheap crap. Nor did we have to export our productive capacity to low wage countries. The only reason for doing so was to make it easy to siphon off profits to the few at the expense of the many US working middle class in the biggest heist and financial rape of its own people in the history of the modern western world.The human misery this man is responsible for in this country is unspeakable.

    And now that the infrastructure of the United States has been stripped bare including the knowledge and skills of a previous generation, and without revenues to cover maintenance and restoration, we are wide open for privatization of everything including the fucking air we breath. That’s the next bubble. Selling everything off to the highest bidders.

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