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Brian’s Theory of Monetary Conservancy

|Includes: Goodrich Petroleum Corp. (GDP)

Nirav at "LivingOffDividen... just gave me some more grist for my opinion mill.  I hope he doesn't mind being my debatee in the Socratic tradition.  )

That site is somewhat Goldbuggish.   While I think gold is a terrific financial asset and has its place in just about any portfolio, I think it is not good to advise people flee to gold because of the prospect of inflation / deflation or everything in between.  Gold has lost people a lot of money over the ages.  It is a store of wealth, but not much of an investment as it does not grow, or help a business grow.  It just sits there like a pretty lump.

Here is the LivingOffDividends post and my rebuttal:

Insurance Company Buys $400 Million in Gold

I just can’t let this one pass without a challenge. Sure, money supply has exploded at the Federal level. But it has done so by deliberate effort to replace the value of assets destroyed by the financial crisis and real estate panic. I think a healthy way to look at this is as a transfer of the financial bubble from weak hands to strong hands that can absorb and dissipate the bubble. By the way, this is the same financial bubble that has been traveling through the American economy since the early 1980s, if not before. The private sector seems to be unable to deal with the hot potatoe, so it had to end up in public hands at this point. But as you say, the wealth will gradually be transferred back to the private sector over the next 5-10 years.

Once money is created, it cannot be destroyed. It is similar to Einstein’s Theory of Relativity and the Conservation of Energy. That theory everyone knows as E=M*C squared. Mass can be transmuted to energy, but it always will exist in a different form. Money is not only preserved over all of time, but can be created by the productive enterprise of humans. Once created, it can be transferred and transmuted into different forms of assets, but it cannot be destroyed (call this “Brian’s Theory of Monetary Conservancy”). Even World Wars have proven unable to destroy wealth, as inconceivable as this seems.

I wrote about this idea on my blog back on May 4th. http://wealth-ed.com/2...
I quoted one of the true financial experts of our time, Jeremy Grantham regarding the phenomenon of indestructible wealth:

“The Great Depression is far and away the most striking period on the chart (see article for link to charts). Real GDP fell by 25% from 1929 to 1933, in what was easily the worst economic event to hit the U.S. since the Civil War. But that fall, as extraordinary as it was, was a fall in demand relative to potential GDP, not a fall in the economy’s productive capacity, and so the economy eventually (by 1945) got back onto its previous growth trend as if the Depression had never happened.”

So, while it is very interesting that a life insurance company has decided to buy some gold to diversify its assets (I am sure a very small percent of its total managed assets), there is nothing about this that should indicate anything significant about gold for the future. Gold is just another class of asset. That is all. It has no special place as compared to other real assets, and it may be less important or significant than assets which have some productive use, like copper or oil.

I also refute the assertion that gold has any use as an asset offering protection when an economy is “weakening”. Gold has some short term panic value, as it did last fall. But if it didn’t shoot to $2500 an ounce during the worst financial crisis since 1930, then it probably is not even good as an insurance policy during a crisis.

The statement: “CEO Zore believes that the price of gold could double “or even rise fivefold” if the economy continues to weaken.”, just tells me that Mr. Zore should not be running a major insurance company. That statement is shear stupidity and shows a lack of financial understanding. Gold might increase by five-fold if the dollar weakens to 20% of its current value. But that is the only way this scenario will play out. For the dollar to weaken in that way, the economy would have to be going strong. We just saw that the dollar STRENGTHENS as a safety trade when the economy tanks.

Yes, gold will appreciate while the dollar depreciates. That is a given. But while people have been watching gold trade between $900 and $1000 the past 3 months, oil has gone from $30 to $70. So which asset has more potential to protect against inflation?

Disclosure: No Positions