Is Gold A Barbarous Relic?

by: Doug Eberhardt


Some mock gold as a barbarous relic. Gold & silver maintain purchasing power over time. Emphasis on the words over time.

Dollars pay interest when stored at a bank. Gold does not. One of these has over $20 trillion of debt backing it. They both take faith from the holder.

Asset allocation says take from what's high (stocks) and put it into what's low (metals). This doesn't mean put all your money in gold!

How much into gold today?

Is Gold A Barbarous Relic?

Many claim that John Maynard Keynes said that gold is a barbarous relic. In reality, it was the gold standard he was referencing in his 1924 book on monetary reform.

The way gold has been acting of late, many might consider it to be a barbarous relic. But let's take a look at some history of gold as money or as the "standard" as that is all Keynes knew gold as at the time he made those comments.

Most don't know the history of the U.S. dollar and its relationship with gold and the Federal Reserve, but a good chronology from Harvard Professor Carmen Reinhart and some of her colleagues follows. We did move away from the gold standard following Keynesian economics, but that complete removal from gold didn't occur until 1971, just 47 years ago. Notice that the monetary system we have now is deemed a "Freely floating" classification of the U.S. currency (the dollar).

Gold standard Freely floating currency

This is a good place to remind you of what Warren Buffett's father Howard had warned what would occur if there was no restraint on Congress back in 1948 when he was fighting to keep some sort of a gold standard. He said:

I will not take time to review the history of paper money experiments. So far as I can discover, paper money systems have always wound up with collapse and economic chaos. From 1930-1946 your government went into the red every year and the debt steadily mounted. Various plans have been proposed to reverse this spiral of debt. All of these proposals look good. But they are unrealistic under our paper money system. They will not stand against postwar spending pressures. When the people’s right to restrain public spending by demanding gold coin was taken from them, the automatic flow of strength from the grass-roots to enforce economy in Washington was disconnected. Before 1933, whenever the people became disturbed over Federal spending, they could go to the banks, redeem their paper currency in gold, and wait for common sense to return to Washington.

My point with writing about a gold standard is not to bring it back. Far from it. I have never written anything about bringing back a gold standard or written anything about a dollar crash or hyperinflation coming. I view the gold standards system as a relic and we wouldn't be where we are today if we were limited to those golden handcuffs.

We have lived the best years of our lives since we left the gold standard in 1971. For many, wealth has been accumulated beyond their imagination, if they had the right connections in the business world or simply by hard work and/or inheritance. Even entitlements have made it so some have lived better lives than most any other country.

This could easily continue longer if Congress discovered fiscal responsibility. But you can't even write that sentence without snickering as the terms Congress and fiscal responsibility are oxymorons. The media keeps our mind busy arguing left versus right politics while both sides of Congress have contributed to the current $21.47 trillion of debt our children and grandchildren are saddled with.

We have sold our soul to the company store and there is no turning back. With no restraints from the People, you are left to the whims of government. I will be writing more on the national debt and how it relates to the economy moving forward in my next article on government spending, so just briefly discussing it here.

The important part to understand when it comes to comparing gold as a standard to the free-floating currency today called dollars, is that dollars have kept up overall with gold as dollars have paid interest. An apples-to-apples comparison of gold with dollars needs to include the tax aspect to each and when you take all that into account, dollars and gold are close to even if you choose the date of separation from gold to dollars only and/or the 1975 point in time when U.S. citizens were allowed to buy more than $100 worth of gold (more of a free market in gold at that time).

If you use 1971 price of gold and the dollar earning interest each year compounded after taxes, assuming you don't touch either till today and pay the 28% tax on the gold at the end, you're not going to have too much of a difference in value. One would have to calculate all of these things and the closest we come to that is Measuring Worth but even they fall short of a real comparison. I have not seen one gold article addressing this comparison in the correct way, however, in 2014, I did calculate the two side by side without addressing taxes.

If you took that data and were to extrapolate it out further to today, include some tax assumptions for the money at the bank and show the last few years of interest rates hovering right above zero and the fall in the price of gold to just under 1200, you'll see the two are close to par. My conclusion on gold then was " Unfortunately, for now, deflation is what the Fed is fighting and even though gold has fallen in price to attractive levels, I think we still have to practice some patience before going all-in."

You'll see what I think about gold in a moment though but this analysis shows the dollar and gold as currencies and that's how I'll always view gold; as a currency. The ironic part of both the dollar and gold though; they both take faith.

Buy Stocks Not Gold - Asset Allocation Thoughts

The typical argument against gold, and one that it seems every article someone wants to bring up is "buy stocks, not gold." This type of comment insinuates that one puts all their money into gold and that is hardly ever the case if you read the comment sections of the articles I write where we trade leveraged ETFs with good success. One would have done better by buying stocks than gold for the most part. But since the times of Nixon, there have been two great times to buy gold: from 1971 to 1980 and the 2000 to 2011 periods.

The gold investor would have done better during those periods. But that's not comparing apples to apples in that gold is a currency and stocks are not. Gold always has been a currency and that is what the issue is here. Most try and trap a gold bug into a false argument of gold versus stocks when the discussion (issue) needs to be centered on currency and diversification, not one versus the other (gold/stocks).

Outside of iPhones (Apple (AAPL)), movies (Netflix (NFLX)), social media (Facebook (FB)) and search engines (Google (GOOG) (NASDAQ:GOOGL)), along with where most buy things these days, Amazon (AMZN), we are just pushing money around here in the U.S. GDP hasn't been much over 4% since 2012, except for the last 2 quarters where the potential of buying before the tariffs go into effect and hits companies may have moved the economy up some. But the last projections for GDP from the St. Louis Fed (GDPNow) were 4.5129% and they fell short as usual.

Asset allocation models are spoken about all the time on Seeking Alpha and I suggest you read the work of Gil Weinreich here as the conversations are centered around the subject. You may get an idea from it when something is overvalued like potentially stocks have become and some rebalancing may be needed. Even our own government addresses asset allocation and rebalancing one's portfolio. They tell investors to "stick with your plan."

STICK WITH YOUR PLAN: Buy Low, Sell High - Shifting money away from an asset category when it is doing well in favor an asset category that is doing poorly may not be easy, but it can be a wise move. By cutting back on the current “winners” and adding more of the current so-called “losers,” rebalancing forces you to buy low and sell high.

At least one can create their own gold standard, to protect or insure wealth today, but again, this doesn't mean put all your money into gold. You can, however, agree that it has done poorly and a move into it now can indeed be wise. But how much into gold now?

How Much Into Gold Today?

Gold should be 10% of one's portfolio in my opinion. However, in buying beaten down assets, this percentage could be increased if you were to "trade" for profit a few percentage points, in taking advantage of the "buy low, sell high" mantra. To answer the question of how much to put into gold or even silver, which has been beaten down more than gold, one could answer this question first: Which coin would you rather own moving forward; a pre-1965 90% silver quarter or a 1965 or later non-silver quarter?

One most always buys you a gallon of gas exchanged for the scrip of the day and the other 25 cents worth of gas. I know you have heard this from me before, but it really doesn't sink in with investors that you really do have that decision to make today. If you are worried about the market topping out soon and want to get conservative, a money market, CD or cash is where one typically goes. My suggestion is to put it in the original cash of the U.S., gold and silver.

I am recommending a 50% allocation into metals and miners right now. This can be GLD, SLV, physical, individual mining stocks. If you are a trader, an allocation into the more risky, non-buy-and-hold ETFs like JNUG, NUGT, DGLD and USLV. You can follow along with our comment section on trading those as well as the articles I have written that explain the rules for trading them.

The dollar (DXY) is trying to break below 95 and I think we finally can close below that opening up the move higher in metals and miners for now. There is an outside chance that we have one last move up to 97/98 for the DXY but it won't change my half in allocation call, except that if you trade leverage it can be a little hard to sit through any downturn. We could just see metals and miners stay steady during any move up in the dollar should it come. If you don't trade leverage, then sit on your trades through any downturn. You may not get the exact bottom here, but close enough I think for the next leg up.


I am still in the camp we get a deflationary credit contraction where we can add the other half purchase. I can't pinpoint a price that will be the buy but will let price action and my system dictate when and write an article. There is always the chance that we might be bottoming in metals and miners now. Adding to a winning position is not a bad way to go either, as much as that seems like a remote possibility with how badly this sector has performed this year. But for the first time in a long time, we have seen shortages of certain physical gold and silver products from some of my large suppliers. That means something to me.

Disclosure: I am/we are long JNUG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Please know that trading leveraged ETFs contains risk and always keep a stop.