From The Street.com:
Alan Heap, an analyst at Citi Investment Research, adds a bearish voice to a crowded debate over where the precious metal is headed. Billionaire investor James Rogers and perma-bear David Tice say gold will hit $2,500. James Turk, Author of GoldMoney, predicts $8,000, while author Mike Maloney is betting on $15,000.
Heap broke with this bull view by saying in a research analysis, "Gold: Paper Problems," that prices will sink to $820 by June of 2014 and head lower long term to $700 an ounce.
The biggest threat to rising gold prices is a substantial decrease in long positions in paper markets, Heap writes in his report:
Positions held by money managers and broader non-commercial positions have fallen since November 2009 when the USD strengthened. Non-commercial net long positions are at 5x the average levels seen over the last 17 years.
So is this another “brick in the wall” of the Austrian theory which was supposed to deliver us from the tyranny of fiat money?
The “Austrian” theory of gold is that it is “real money” and Central Bankers are at best morons and at worst, charlatans. Personally, whilst I have no problem with the second point, I do have a problem with the first one.
There are plenty of benchmarks banded about; the price of gold compared to its price when there was a gold standard (i.e. in 1970) and you come up with $3,600 an ounce. Compare it to M3 and you get $5,000 an ounce, use the James Turk “sound money indicator” and you get to $9,391. And if you look at historical trends between the price of the DOW and gold you can come up with $15,000.
That’s if gold is “real money”, but I just wonder, what is “real money”, really.
Or in other words, is there any chance that some time in the future the world will go back to the days when gold was used day-to-day as money?
And that everyone who owns gold will have a bonanza as the central bankers come crawling to them to exchange $15,000 for one ounce of gold, having promised that ratio would be maintained forever and ever and that in the future, they will be “good” and never debase their currency?
I dunno, I do believe in fairies, but I’m not sure I believe that’s going to happen.
I was born in Kenya, which is a slightly different sort of place than some other parts of Africa, in that when I was a kid at least, quite often white people socialised with black people, and vice versa.
I spent most of my childhood running round the forest with the black kids from the village down near the river, and I can report that apart from the obvious differences of appearance, they had a different outlook on life from many of the white kids I got to meet when I got sent off to get “schooled”, some of which I picked up inadvertently. I’m told that explains a “lot”.
Apart from the fact that black kids can dance and they could also spot a snake ten minutes before I could, one of the ideas they had was that “sound money” was not gold, and it was not the paper money that the British Government at the time used to issue, it was cattle.
They had been using cattle as currency since the beginning of time; the only reason that got changed was because the British (like my dad) came along and took over all the best farmland which was how the joys of ”modern civilisation” got brought to that particular neck of the woods.
The next problem they faced was getting the locals to work on their farms. The problem was that the “locals” were quite happy doing whatever it was they had been doing before (although on a much smaller patch of land). So what the clever British did was they started to tax them and the only way that anyone could get hold of this paper stuff, which was required to pay the taxes, was to work. Clever, eh.
That’s how in the place I grew up black people used to do all the work and white people used to sit in the shade drinking gin & tonic, which I understand is where the word “division of labour” comes from.
My (simple minded) theory of fiat money is that it’s a system designed so that a few lucky people can sit in the shade drinking gin & tonic, whilst everyone else works. Which appears to be the way they organise it in the USA these days. Over there a few lucky bankers can make billions of dollars doing not very much, whilst everyone else works so they can pay their taxes. Such are the joys of “civilization”.
The Austrians however can (they think) prove beyond any reasonable doubt that gold is the perfect form of money, and that true Nirvana can only be realised when it has been re-instated as was “written” in the Constitution of The United States of America.
These are the arguments:
1: Gold is rare and its only useful function is for adornment for special occasions (mainly of women) . Well that’s true but so are cattle (in Africa) and the main reason people keep cattle (apart from the Masaii but I won’t go into that) is to eat them on special occasions, like weddings and such.
2: Gold is indestructible. That of course is true, so are cattle more or less. OK they die and get eaten from time to time, but unlike gold they also reproduce, so that balances it out.
3: Gold is easily transportable. That is true also, but so are cattle, they come equipped with legs.
4: Gold is divisible, so you never get stuck with having to change a $100 bill for example. True also, and I accept that it’s a lot harder to divide a cow into two equal parts than a piece of gold. However in the place I grew up the primary use for cattle as a system of currency was to pay for a wife, and as far as I am aware there is no recorded instance in the whole of history where you could buy one wife for less than one cow (although theoretically in the event that became an issue, you could solve that by buying two for one).
OK, I accept that in the modern world it is socially unacceptable to have two wives (where I grew up some people had ten), but in the modern world also gold is not as transportable as for example a bank transfer. Imagine paying for a virtual set of flowers on your virtual Internet world with a speck of gold, sent presumably by first class mail to some dude in Bangalore.
Oh you say, but the paper stuff, or increasingly the electronic stuff is OK so long as it is “backed by gold”. Well OK, but why not “backed by cow”, like “I promise to pay the bearer of this note one cow”?
If the world is going to go back to its “roots” why not go all the way, and instead of going back to something that has been used as currency for thousands of years (with varying degrees of success – the Romans had housing bubbles too), why not go the whole hog and go back to a system that worked great for hundreds of thousands of years?
Ah, but the Austrians say that the current malaise was caused by fiat currency. Well it wasn’t, the current malaise was caused by securitization gone wrong.
There is nothing wrong with securitization if you do it right – that’s how Hitler financed the Second World War (that worked for him – he didn’t have any gold), and the “old” system of securitization using covered bonds, which was invented a couple of hundred years ago, never had a problem either.
What the corruption of the securitization process in the USA did was cause inflation by stealth. From 1998 to 2008 the US Government issued on average about $350 billion of Treasuries a year. The shadow banks (who are private corporations that operate broadly independently of the government – like the Federal Reserve), issued on average about $1.25 trillion a year.
Everyone, particularly the Austrians, say that the “mal-investments” made in the USA from 1998 to 2008 (mainly in housing) was due to too much money, thanks to an over-supply of credit, chasing too few assets. Well that money didn’t come from “quantitative easing”, it came from securitization.
So who was running the monetary policy then? Was it the man with the specs who spoke in riddles, or was it “God’s Workers”?
The theory now is that the US Government and the Federal Reserve are going to create inflation, like what happened between 1998 and 2008, and that will help make the national debt become more manageable. But more important, will help all those homeowners who are underwater pay off their mortgages.
And that will of course be good for gold. Look at how the price more than doubled from 1998 to 2008 when the shadow banks were creating inflation hand-over-fist by securitizing anything that moved and issuing AAA bonds that had more or less the same status as US Treasuries (OK, their risk weighting was 20% not 0%, but that’s just detail).
But if there is one thing that has become blindingly obvious over the past year, like an elephant in a Jacuzzi that no one wants to see, is that although governments appear to be very good at creating inflation by accident, their base assumption that if you can shoot yourself in the foot by accident, you ought to be able to do it on purpose, has proved to have been completely false.
How many articles have you read recently about hyper-inflation being just around the corner, and that soon we will have to take a wheelbarrow when we go down to the ATM. Six months ago that was all anyone could talk about.
And on the subject of “going back to the old days”, the idea of going back to those heady “golden years” from 1998 to 2008, when you could securitize your mother-in-law if you liked, is just a fairy story.
Those days are not coming back any time soon, not until there is a consensus on how to price the $20 trillion dollars (at face) of securitised debt that was created from 1998 to 2008, and the only people buying that junk now is the Fed.
Right now, faced with the option of buying a lot of gold and an Uzi and stashing it under my bed (which, seeing as the whole market for gold appears to have been completely corrupted, is the only option), or buying a plot of land and some cows, I’m inclined to go with the cows.
Disclosure: "No positions in Gold"
