More Of The Shiny Stuff

A few random jottings on gold while I’m out on the road; back in a week.

The other day, I came across this article in the Mises Daily, taken from Joseph T. Salerno’s testimony submitted to the U.S. House Subcommittee on Domestic Monetary Policy and Technology. It is a concise critique of the fundamental problem of fractional reserve banking. I do urge you to read it in full; Salerno arrives at the following conclusion:

The solution is to treat banking as any other business and permit it to operate on the free market — a market completely free of government guarantees of bank deposits and of the possibility of Fed bailouts. In order to achieve the latter, federal deposit insurance must be phased out and the Fed would have to be permanently and credibly deprived of its legal power to create bank reserves out of nothing. The best way to do this is to establish a genuine gold standard in which gold coins would circulate as cash and serve as bank reserves; at the same time the Fed must be stripped of its authority to issue notes and conduct open-market operations. Also, banks would once again be legally enabled to issue their own brands of notes, as they were in the 19th and early 20th century.

Last week, I was discussing the issue of the gold standard with the economics lecturer friend I mentioned in an earlier thread. He gave what I understand to be the standard argument against gold, that a country with negative terms of trade will see a flight of gold from the country. If domestic gold production does not meet the imbalance, eventually the country will run out of gold and will not be able to import anything. He then gave me a couple of freshman textbooks on micro- and macro-economics, the latter of which deals peremptorily with the issue in the final chapter. I do intend to read through these (thanks mate) and maybe take his institution’s freshman exam when I’m done.

I later had a think about this theory, which seems to exaggerate the gold argument into a straw man, implying that gold is not merely the only sustainable medium of exchange, but the only thing of any real value at all. A country with negative terms of trade still produces goods and services that can be exchanged for money, both domestically and abroad. If sold domestically, in a market where gold is in short supply, the products will attract less gold than if sold abroad. So producers will be more inclined to export their product, which will then go towards re-balancing the terms of trade. A self-correcting system, in other words.

But then, I imagine, the question will be raised, but what about a developing or struggling country with little in the way of exportable products? Such a country still has its labour force, which in such an environment would be in high demand. China today is the classic example of a nation benefiting form this, having both an exploding middle class as well as a vast pool of urban and rural cheap labour. As China progressively morphs into a first-world economy and its supply of cheap labour dries up, Brazil and sub-Saharan Africa appear to be the next beneficiaries of this phenomenon.

In the same vein (pun intended), the trade imbalance argument also appears to ignore foreign investment. When a rich foreign nation invests in a poorer or developing one, at least some proportion of that wealth remains in the target country (or there would be no point in their accepting such investment in the first place). In a global monetary system backed by gold, that means a gold inflow, again re-balancing the equation.

Those are my own inerudite, first impressions. For a more learned Austrian perspective on the gold standard and trade imbalances, a brief search of the von Mises Institute’s archive turns up this, this and this.

Quite apart from the issue of a gold standard of money, there is also some debate over the value of gold as merely one commodity among many. When James Delingpole the other day made passing reference to an earlier thread he did on gold, certain comments included opprobrium such as this:

James, get off the BS ‘goldbug’ bandwagon.
Gold is just as fiat as everything else (and for fractional reserve use and manipulation by bankers, it was even worse), and it’s just a commodity (the vast majority of it is used for jewellery ffs).
It’s an overinflated asset bubble (just like everything else), and those pushing the Ponzi Scheme will probably end up having the hounds set on them.
If what the goldbugs say, is correct, then nobody would be selling gold. Would they?
They are a bunch of snake oil salesmen looking for bagholders, and it does seem, James, that “Sold to YOU!” applies to you too.
PS. If we are stupid enough to revert to a gold standard, that means most of the World is condemned to live in perpetual poverty.

And this:

Agree, Gold is just another scam / asset bubble.
JD don’t know what he’s talking about….

This got me thinking. I certainly don’t make any claim to “know what I’m talking about”, in the sense the commenter probably meant it. So, not “knowing”, I went to check out the latest spot prices on gold (click charts for updated figures):

Since last year’s panic, when Europe’s collapse was widely believed to be imminent and fast-moving, and gold spiked at over US$1900/oz, there has been a tailing off. But note the 10-year trend. For the arbitrageur, gold might be indeed a risky short-term proposition. For the long-term investor, the chart speaks for itself.  From $300 at the beginning of 2003 to $1588 closing last Friday: that’s an annualized return over 9.5 years of about 19%.

Gold investors holding the bag? Hugely over-leveraged ones, such as commodities traders, who are unnaturally vulnerable to short-term price fluctuations, perhaps; everyone else is a winner and a grinner.

And the dip from last year’s spike? Let’s compare the other three precious bullion spot prices; here’s silver:

Platinum:

And palladium:

In other words, the dip in gold is nothing special; it has been reflected across the precious metals market. The long-term trend, though, is clear. And gold has been the most consistent of them all.

The Chinese are no fools; they are reputedly buying up all the gold and foreign real assets they can get their hands on—and largely using their U.S. dollar reserves to do it. Hard times are a-comin’, and those with foresight seek safe havens.

Over to you. I’m spending the week working up in sunny Queensland, and should be back by the weekend.