David Lentz

Gold is Money - And Nothing Else

If gold is a currency, then I should be able to buy groceries with it, or gas up the SUV, without resorting to an exchange from a commodity into a currency to facilitate this. Credit is a currency, cash is a currency. Gold is a commodity, just like oil or corn, but closer to art and collectibles.

That's not to say that one cannot make a pile of money from gold, as the USD declines ad nauseum. But it's not money. Money is a medium of exchange allowing items of value to be exchanged (example: your time at work in exchange for your salary). Gold is an item of value.

Gold and Oil Price Limits

Yes, yes, $2000 gold ... when? If it arrives after oil crashes for the last time, when I am growing potatoes in my lawn and canning fruits to get me through the winter without starving -- a winter that I'm cutting down the trees in my yard to burn for heat -- then I really could care less about gold, whether it's priced at $2000 or $200000.

As Keynes reminded us all, in the long run we are dead.

Matters of pricing are of interest to us only over the short haul.

The Myth of Gold as an Inflation Hedge

BTW, electraman -- I find the events in the economy of the late 1970's (oil prices spiking to record highs, the economy feeling the impact of government spending on foreign wars (Vietnam was heavily deficit-spending funded, and took the economy years to recover from), recession) eerily similar to those of today. Looks to me more of a case of comparing oranges to tangerines.

And if there is inflation, show it to me in the money supply numbers, please -- don't just rant about it. Rising prices does not equal inflation.

Mish Shedlock (and others) have repeatedly demonstrated that there is no overt expansion in the money supply, that the real danger is that the Fed is not able to create credit as fast as it is being destroyed, and we will slide into deflation.

The Myth of Gold as an Inflation Hedge

If this was a "blatant attempt to knock down gold", it's succeeding far better than anyone could have believed!

More likely is the possibility that gold is a highly volatile (and emotional) commodity, with no more inflation resistance than any other commodity -- possibly less, due to all the attention focused upon it.

And rather than looking at the price of gold from the prior peak (1980) or low (~2000), it might be helpful to look at a chart of gold vs the dollar over the past hundred years or so. Then I think one would see that if there is a correlation between the two, it is not a very strong one.

Is the Gold Rally Really Over?

It never ceases to AMAZE me that the gold bugs can be so obviously of two minds about the subject of "money". They can treat it as exclusively and only printed (physical) cash -- of course an exceedingly tiny minority of the Fed-created "money" is in paper dollars -- and at the same time recognize that credit is money too, or some sort of lesser variant that they don't want to think about too awfully much, 'cause it makes their heads hurt.

You see, once you acknowledge that the Fed creates "money" by extending credit, you are (or should be) pretty much compelled to look at the "supply of money" as encompassing both physical dollars and extended credit (almost entirely extended credit, as it happens).

Or maybe they feel that they can treat credit extended by the Fed as somehow different from credit extended by Countrywide Finance -- yet each will purchase pretty much the same amount of physical assets, on the same dollar basis. The credit extended by the Fed is pretty much interchangeable with any other form of credit, subject to the willingness of the seller to accept it, and its ability to be exchanged for other forms of credit/money.

Money, in whatever form it occurs in, is simply an intermediary between assets.

So when gold bugs look at the Fed's high-speed virtual printing presses whirring away and completely ignore the ginormous vacuum of collapsed credit that they are attempting to replace, they miss the boat entirely.

Hence the disconnect between those concerned about deflation and those concerned about inflation.

The real concern should be how accurate the Fed can possibly be in this endeavor, with the fuzziness about what credit is sound and what is not forced into stark black-and-white contrast by mark-to-market accounting.

If the Fed overshoots the mark, we are left with an abundance of "money", and we get inflation. If the Fed undershoots, we get deflation. With inflation, the value of gold in dollars will increase, but with deflation, dollars will be preferable to gold (or most other hard assets).

The gold bugs had better be hoping that the Fed more than fills the credit vacuum, and should be worrying about the ability of the economy to accept so much Fed credit. Even if gold is worth $10,000 per ounce, it's pretty useless if you cannot buy groceries or gas with it. And once markets collapse, that's the scenario you are left with.

Value of Gold Over the Ages

And how do they manage to value gold in US dollars long before there ever was a US dollar? That can't be particularly accurate.

But all that aside, this ought to strike a shiver of fear into the hearts of the gold bugs, when the ONLY time that gold has proven to be a sound choice over the entire history of the US dollar was in the late 1970s spike when inflation showed signs of turning into hyperinflation.

Given that there is a substantial ongoing debate about whether we face inflation or deflation, if it comes down on th eside of deflation -- well, just look at the performance of gold during our last deflation in the Great Depression. Not a pretty picture for someone with a major position in gold.

(for the record, I have about a 15% position in gold, mainly because I am not yet sure which way the inflation/deflation argument will be resolved -- and I'm nervous as hell about it)