David Einhorn on That Barbarous Relic, Gold

Hedge fund manager extraordinaire and 2007 Lehman Brothers doubter David Einhorn had a few thoughts to offer on the barbarous relic, gold the other day in a speech delivered to the Value Investing Conference. The entire text(.pdf) is available at Reuters and Rolfe Winkler had some additional comments also.

Four years ago I spoke at this conference and said that I favored my Grandma Cookie’s investment style of investing in stocks like Nike, IBM, McDonalds and Walgreens over my Grandpa Ben’s style of buying gold bullion and gold stocks. He feared the economic ruin of our country through a paper money and deficit driven hyper inflation. I explained how Grandma Cookie had been right for the last thirty years and would probably be right for the next thirty as well. I subscribed to Warren Buffett’s old criticism that gold just sits there with no yield and viewed gold’s long-term value as difficult to assess.

However, the recent crisis has changed my view. The question can be flipped: how does one know what the dollar is worth given that dollars can be created out of thin air or dropped from helicopters? Just because something hasn’t happened, doesn’t mean it won’t. Yes, we should continue to buy stocks in great companies, but there is room for Grandpa Ben’s view as well.

I have seen many people debate whether gold is a bet on inflation or deflation. As I see it, it is neither. Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible. Gold did very well during the Great Depression when FDR debased the currency. It did well again in the money printing 1970s, but collapsed in response to Paul Volcker’s austerity. It ultimately made a bottom around 2001 when the excitement about our future budget surpluses peaked.

For some of us, this is simply stating the obvious, while, for a good number of those attending this conference it was probably akin to a clergyman announcing he was now an atheist.

It's funny that the issue of "sound money" never comes up these days in anything other than an occasional Wall Street Journal editorial, about every other Ron Paul speech, and in gold bug circles, this fundamental issue being touched on only briefly in Einhorn's speech.

But, that's what is really at the heart of the matter.

A few weeks ago, the Office of Inspector General called out the Treasury Department for misrepresenting the position of the banks last fall. The Treasury’s response was an unapologetic expression that amounted to saying that at that point “doing whatever it takes” meant pulling a Colonel Jessup: “YOU CAN’T HANDLE THE TRUTH!” At least we know what we are dealing with.

When I watch Chairman Bernanke, Secretary Geithner and Mr. Summers on TV, read speeches written by the Fed Governors, observe the “stimulus” black hole, and think about our short-termism and lack of fiscal discipline and political will, my instinct is to want to short the dollar. But then I look at the other major currencies. The Euro, the Yen, and the British Pound might be worse. So, I conclude that picking one these currencies is like choosing my favorite dental procedure. And I decide holding gold is better than holding cash, especially now, where both earn no yield.

Yes, the argument about gold earning no interest and providing no yield seems to have taken on a whole new context now that it is about on par with the interest and yield on many other assets that, suddenly, look much riskier than gold.

Mr. Einhorn favors the physical metal rather than any of the paper varieties and in a Q&A session following his speech he reportedly said that his stash is not far from where he was speaking in New York city.

Comments

[Dave Wrixon:]

Whether Gold is money or a commodity depends on how people think of it. There is no doubt a vocal group still see it as money, but I tend to think it is behaving more like a commodity than it ever used to.

Oct 22 09:27 AM

[User 353732:]

It is now the Fake Dollar that is the barbarous relic and real assets( of which gold is only a small subset), plus nuclear technology and bandwidth, that are the rising stores of value and geo-strategic media of both economic and power exchange.

Oct 22 09:48 AM

[Screwloose:]

Tim

It may seem pedantic; but Keynes described the Gold Standard as a "barbarous relic" - not gold itself.

"In truth; the gold standard is already a barbarous relic."

[Page 172 of "A Tract on Monetary Reform" 1924]

Oct 22 10:26 AM

[Vuke:]

Dave:

If it was behaving like a commodity it would react in exactly the opposite way than its recent performance. The huge overhang, lack of real usage and threats of economic collapse would drive its price down to silver, or even copper. Copper is a much handier metal.


On Oct 22 09:27 AM Dave Wrixon wrote:

> Whether Gold is money or a commodity depends on how people think
> of it. There is no doubt a vocal group still see it as money, but
> I tend to think it is behaving more like a commodity than it ever
> used to.

Oct 22 10:55 AM

[bob adamson:]

The fiat monetary system is awful, except in comparison to the alternatives. Sure, in times of stress people turn to some extent to commodities, especially gold, as a store of value to wait out the storm but it is an illusion to think that a sophisticated global economy could operate on the gold standard let alone using gold as the medium of exchange.

Oct 22 01:25 PM

[fireball:]

maybe gold and silver should be viewed as secure savings.

Oct 22 01:37 PM

[debtacid:]

“YOU CAN’T HANDLE THE TRUTH!”

How true. No one seems to have the guts to challenge the foundation of the problem and admit the magnitude of the betrayal we are dealing with. My father helped put a man on the moon but my mom was the smart one. She taught me to always find the root cause of the problem and just when you think you’ve found it, keep looking because it might turn out to be something you didn’t expect or want to admit. The struggle of western civilization against the tyranny of central bankers is long and bloody. The bankers finally won that struggle when the federal reserve was swindled in to existence in 1913.

Oct 22 01:46 PM

[The Recusant:]

Ahhh...labels. Commodity vs. money, deflation vs. inflation, liberals vs conservatives. Why do we have to stuff everything into one definition when they are usually part of a sliding scale. As for gold, I believe it is a metacommodity that is both a commodity and a de facto currency. And as currency it will react rising to the devaluing dollar whether in a deflationary or inflationary period. And as a commodity, it will conversely react during economically strong times as a commodity does rather than as a currency. So, Warren Buffett is actually correct most of the time, while David Einhorn is right under these current circumstances. Now can we move on?

Oct 22 02:58 PM

[Slvrizgold:]

All of the smartest people are investing in precious metals. PM investors are the only people who have been making money for most of this decade. Gold will go MUCH higher over time. It is nowhere remotely a "bubble" - YET!

A lot of people talk about the budget deficits and debt monetization and these are obviously dollar negative, but for cryin' out loud if Obama balanced the budget tomorrow (lmao) GOLD STILL IS GOING HIGHER! The US is COMPLELY bankrupt - economicially for sure, and also morally and spiritually. The is no way all the liablities could EVER be paid for going forward without a strong printing press! So protect yourself and don't be a schmuck and let inflation eat you alive! DON'T BUY ETF METAL! Buy physical metal. Most experts think there are severe inherent risks with the ETFs and avoiding risk is the primary reason you hold gold.

Oct 22 08:14 PM

[Beach Bubba:]

I'm old, my grandparents died of old age in another century. I know that my grandmother saved silver coins and an occasional gold one. She bought the small savings bonds during the war and after from a treasury that backed the currency with gold. I still have the coins and the bonds paid for many things...none of luxury class. I still follow her advice and buy silver coins and an occasional gold one. I have never lost a penny on a silver coin, some are returning several times over the purchase price. I have a lot of silver and a little gold. I will buy a coin anytime I can afford to part the few dollars one might cost. They are neat to look at and they feel good to hold. I buy them in Mexico at the bank for a dollar or two over spot....a lot of people do.

Oct 22 09:00 PM

[Albertarocks:]

My mistake. At first glance when I read the title of this article Barbarous Relic, I thought it was about Dick Cheney.

But it turns out it's about gold, so let's talk gold. The link below takes us to a different story here on SA which speaks directly to this article by Mr. Iacono. It's possible that the entire key to the questions posed in this piece about the future of gold prices and of various currency values going forward might be contained in a few key words from that article. Here they are:

"Concerns about the decline in the dollar creating deflationary pressures in European, Japanese and other economies may lead to tense meetings at the upcoming meeting of finance ministers from the world's 20 largest economies, taking place in Scotland on November 6th and 7th. There is a realization that the “strong dollar policy” is no longer the thrust of US policy. An overriding US policy objective may now be to ensure that the benign and orderly falls to date do not become a disorderly dollar unraveling."

Keyword = unraveling

Are they suggesting that the leaders of the world's economies are getting somewhat infuriated now that they are recognizing there's actually a possibility of a full blown panic sell-off of the dollar? Those are words of a panicked group, are they not?

Oh man, if this gets out of control, we're going to see a sell-off in every currency in the world, each trying to beat the others to the bottom. Gold would to a million dollars an ounce. Maybe a little less, but you get my drift.

Here's the link to the entire article, which is pretty short and to the point.

seekingalpha.com/artic...

>So, I conclude that picking one these currencies is like choosing my favorite dental procedure.<

The answer to that question is fairly simple. Forget the dental procedures. Let your teeth fall out and replace them with gold ones. And hurry up about it.

Oct 22 11:08 PM

[chux08:]

I get a kick out of those that always look at a gold chart I guess for guidance on where we may be going before purchasing any gold. The chart you should be looking at is that of the US dollar. And when a friend showed me a gold chart the other day, to dramatize my point, I took his chart and turned it around and I'll be dammed it looked EXACTLY like the dollar chart!!! Anyway, if it drops much any further, Halloween won't be the only SCARY thing happening at the end of October....
Buy some physical gold and/or some shares of mid tier or major gold producers, but do it quick. Don't wait for the herd. Get yourself and your money....ready NOW!! Before the dollar crisis is upon us.

Oct 23 12:45 AM

[Anthony Alfidi:]

Mr. Einhorn's novel insight links gold's desirability to irrational policy and not to macro conditions. That is an effective answer to gold skeptics like Mish Shedlock who dismiss gold because it didn't live up to its inflation-fighting reputation in the 1970s.

Oct 23 07:19 AM

[5142152-337:]

Beach Bubba: Very sound! Be careful of what you are buying...lots of counterfeit coins are out there now (mostly from China).

What silver are you buying from a Mexican bank? Mexican Pesos? Those .900 silver pesos have been counterfeited too. Be careful, and enjoy!

Oct 23 10:38 AM

[5142152-337:]

Bubba: An easy way to check if the coins real....get a WOODEN spoon and tap that coin. If it has that familiar "ring" to it, its GOOD! If you get a thud, sorry, its bogus!

Oct 23 10:42 AM