Gold Chart Gone Hyperbolic

[rranjan]

 

Which brings me to the next point, the infamous Buffet Cube point that Sanjeev brought up. This point too is so inaccurate and was crafted tongue in cheek, by buffet who knows better. In an economy we must use a medium of exchange (currency). Now either you believe that the value of that currency should be centrally controlled and erode over time (Keynes/Johns Law) or you believe that currency should have intrinsic value and retain that value over time. History has proven, unequivocally that centrally controlled fiat currencies always erode in value and never work over time, relating to Johns Law I suggest the book: Popular Delusions and the Madness of Crowds, to learn more about the kind of bs John Law was up to :)

 

 

You are comparing gold with fiat currency as medium of exchange. Buffet did not argue against gold while taking about medium of exchange. Buffet was comparing merit of gold vs quality businesses as an investment. How it was tongue in cheek comment?

[Liberty]

You are comparing gold with fiat currency as medium of exchange. Buffet did not argue against gold while taking about medium of exchange. Buffet was comparing merit of gold vs quality businesses as an investment. How it was tongue in cheek comment?

 

Indeed. Holding gold vs. holding cash for the long term, I'd probably go with Gold.

 

Holding gold vs. holding good businesses that I bought at low prices? No contest, the businesses actually produce something of value.

[moore_capital54]

Ericopoly, To answer your note, I suggest you read a book titled: "Recent Economic Changes" by David A. Wells.

 

I actually found it for you on google books: http://books.google.com/books/about/Recent_economic_changes.html?id=LG2oz49UcykC

 

The dull title of "Recent Economic Changes" does no justice to David A. Wells's fascinating contemporary account of a deflationary miasma that settled over the world's advanced economies in the 1880s. His cheery conclusion: Prices were falling because technology was progressing. What had pushed the price of a bushel of wheat down to 67 cents in 1887 from $1.10 in 1882 was nothing more sinister than the opening up of new regions to cultivation (Australia, the Dakotas) and astounding improvements in agricultural machinery. In the U.S. between 1849 and 1884, population had risen by 141%, wheat production by 410%. Farmers howled about the price drops, but humanity gained. Luckily, there was no Federal Reserve (it came about in 1913) to find in these trends a deflationary crisis that required amelioration by the vast production of new dollar bills.

 

Keep in mind, that even in a gold standard system mine supply is roughly 0.8% a year, which equates to a 0.8% "Inflation" rate.  There are also ways to increase the money supply when using a precious metal standard, for example you can incorporate Silver as a medium of exchange.

 

 

 

[moore_capital54]

Liberty and Rranjan, I agree with you both, there is no doubt that I feel more comfortable picking good businesses and that my belief in my skills has led me to allocate most of my investable assets in that way, but with that said I prefer to have excess cash held in gold as I have done for the past few years in an environment where central banks are deliberately eroding the value of cash.

 

Many funds have incorporate a gold asset class for this same reason.

[oec2000]

Over time, the value of fiat money will erode, when measured against the value of goods/services/ and finite commodities. 

 

The flaw I see in gold is that it essentially rises in real purchasing power over time yet is meant to remain stable.

 

Observe:

fixed quantity of gold at the same time as a rising quantity of goods&services.  Doesn't this lead to the cost (priced in gold) of goods/services to fall?

 

You can't forever increase goods and services and have stable prices vs a fixed amount of gold. 

 

Anyhow, that's the flaw I see in it.  Creates deflation effectively.

 

 

 

The quantity of gold is not really fixed - it increases over time due to new production.

 

The beauty is that its supply is in a way self-adjusting to the rising quantity of goods. If the value of gold rises relative to goods (because of limited supply of gold), this will cause more gold to be mined which would then bring the equation back into balance. This is probably why gold has more or less retained its purchasing power even as the quantity of goods consumed has increased exponentially.

 

The key is that the quantity of gold is only "fixed" at a particular "price" of gold. True, there may come a day when we completely exhaust our supply of all gold on the planet in which case your scenario would play out. I don't think we are at that point yet. Until then, it seems a better alternative than a fiat money system dependent on the whim (or, worse still, ideology) of one individual such as Greenspan or Bernanke.

 

 

[ERICOPOLY]

There are also ways to increase the money supply when using a precious metal standard, for example you can incorporate Silver as a medium of exchange.

 

Yes as long as the money supply continually increases as needed the system will work out (stable purchasing power).

 

However if you can just incorporate silver what do you say to the people who wish to be redeemed in gold?  I understand the last gold standard fell apart when foreign creditors asked for their gold back.  Are you in theory going to give back all of the gold if that's what they ask for?  And then be left with just silver?

 

How can it be designed to guarantee that the currency is redeemable in gold, without potential for failure?

 

 

[moore_capital54]

Parsad, I stand by my comment that Mr. Buffet said this "tongue in cheek"  as did Munger when he said that people who made money on gold are "Jerks" in his address at the University of Michigan. Buffet and Munger have lived through the gold standard and they were all very much against the demonetization of gold and silver. This is all supported by facts and historical press releases from Berkshire Hathaway.

 

What Nixon did in 1971 struck at the heart of sound investors such as Buffet and Munger, and it shaped their investment outlook, understanding far sooner than most of their cohorts what the increase in money supply would mean when deploying capital over long periods of time.

 

To your next comment about gold as "some sort of utility" it too is very inaccurate. Just as you have been impressed and immersed yourself in the teachings of Graham & Dodd, which were derived from the hard lessons of the great depression, you should at the least immerse yourself in some monetary history, it is in my opinion the duty of any longterm investor.

 

Comparing Gold to Water is wrong.

 

Water is a renewable natural resource which is is not rare at all and quite literally evaporates.

 

If you dig into the foundation of capitalism, and commerce, and free markets one clearly understands that the basis for trade must be a monetary unit of exchange that is stable, cannot be manipulated by man, and is fungible.

 

Oil - Is not fungible, and there is way too much in the world per capita to serve as form of monetary exchange, Sure you could peg the issuance of fiat money to the price of oil, but this would be misleading as Oil is not the most important gauge of economic prosperity. Gold is perfect because it is rarer than all industrial commodities and so when priced in gold, the prices of those commodities remains as stable as can be, let alone any fundamental supply and demand issues relevant to each respective commodity.

 

Platinum - Too Rare, not ubiquitous enough, but is still used as a precious metal and has retained its value perfectly.

 

Silver - A lot more abundant than gold, nevertheless it too has outperformed any fiat currency over the last 40 years. Mr. Buffet once purchased 10% of the world's silver supply due to its fundamentals and quoted his nostalgia from the time Silver was demonetized by the US Government.

 

Diamonds - A lot of people think diamonds are rare when in fact they are not, moreover you can create diamonds as they are basically carbon. Finally, Diamonds are not fungible and it is almost an impossible task to rate two diamonds unless you are a professional. For this reason diamonds can never be a ubiquitous medium of exchange.

 

The Electronic Settlement gold argument I too have a hard time understanding the logic there.

 

I suggest you read this piece by passport capital and see if you still feel the same way about Gold.

 

http://www.zerohedge.com/sites/default/files/Passport%20Capital%20Physical.pdf

 

I agree with both your statements about Buffet, as I explained earlier, but you have to do as Mr. Munger says, always gauge someone's statement based on their self interest. At this point in Buffet's career, the last thing he wants to see is a reversion to the gold standard.

 

For several thousand years, human beings tried many different forms of money and in the end always came back to Gold. You cannot trust human beings with the responsibility of issuing, and governing just how much money is "enough", it never works. Gold is not an investment, I would rather own BAC than GOLD. But I wish that my currency was backed by gold. And that is the argument we should all be having, where the pro's and cons could be argued based on points such as what Ericopoly brought up.

 

[moore_capital54]

Ericopoly, it would be a ratio of gold to silver. Some good reading on this:

 

http://projects.vassar.edu/1896/currency.html

 

One more thing relating to your note that gold always causes deflation: In a fractional reserve banking system, gold would back the base money but not the broad money which would be created at the commercial bank level, hence the supply of money would still be elastic based on the growth of economy.

[moore_capital54]

Howard Buffet- Warren's Father on Gold as Money and the dangers of Fiat Money:

 

http://www.zerohedge.com/article/howard-buffett-said-human-freedom-rests-gold-redeemable-money-called-return-gold-standard

 

 

[Liberty]

My understanding is that Munger believes strongly in doing things that are good for "the civilization", so I don't think he was kidding when he said that people who just pile up gold and hope to later sell it to someone else at a higher price are "jerks", because they're using their resources and energies for an activity that isn't really productive. Buffet's comments about "fondling the cube" lead me to believe that he thinks along similar lines, but won't be quite as abrasive about it as Munger (as usual).

[rranjan]

Howard Buffet- Warren's Father on Gold as Money and the dangers of Fiat Money:

 

http://www.zerohedge.com/article/howard-buffett-said-human-freedom-rests-gold-redeemable-money-called-return-gold-standard

 

 

 

I am not commenting on Howards Buffet's view here but the truth is nobody, including you, would have bothered to read what Howard Buffet's views were on this topic if he was not Warren Buffet's father.

[seshnath]

Parsad, I stand by my comment that Mr. Buffet said this "tongue in cheek"  as did Munger when he said that people who made money on gold are "Jerks" in his address at the University of Michigan. Buffet and Munger have lived through the gold standard and they were all very much against the demonetization of gold and silver. This is all supported by facts and historical press releases from Berkshire Hathaway.

 

What Nixon did in 1971 struck at the heart of sound investors such as Buffet and Munger, and it shaped their investment outlook, understanding far sooner than most of their cohorts what the increase in money supply would mean when deploying capital over long periods of time.

 

To your next comment about gold as "some sort of utility" it too is very inaccurate. Just as you have been impressed and immersed yourself in the teachings of Graham & Dodd, which were derived from the hard lessons of the great depression, you should at the least immerse yourself in some monetary history, it is in my opinion the duty of any longterm investor.

 

Comparing Gold to Water is wrong.

 

Water is a renewable natural resource which is is not rare at all and quite literally evaporates.

 

If you dig into the foundation of capitalism, and commerce, and free markets one clearly understands that the basis for trade must be a monetary unit of exchange that is stable, cannot be manipulated by man, and is fungible.

 

Oil - Is not fungible, and there is way too much in the world per capita to serve as form of monetary exchange, Sure you could peg the issuance of fiat money to the price of oil, but this would be misleading as Oil is not the most important gauge of economic prosperity. Gold is perfect because it is rarer than all industrial commodities and so when priced in gold, the prices of those commodities remains as stable as can be, let alone any fundamental supply and demand issues relevant to each respective commodity.

 

Platinum - Too Rare, not ubiquitous enough, but is still used as a precious metal and has retained its value perfectly.

 

Silver - A lot more abundant than gold, nevertheless it too has outperformed any fiat currency over the last 40 years. Mr. Buffet once purchased 10% of the world's silver supply due to its fundamentals and quoted his nostalgia from the time Silver was demonetized by the US Government.

 

Diamonds - A lot of people think diamonds are rare when in fact they are not, moreover you can create diamonds as they are basically carbon. Finally, Diamonds are not fungible and it is almost an impossible task to rate two diamonds unless you are a professional. For this reason diamonds can never be a ubiquitous medium of exchange.

 

The Electronic Settlement gold argument I too have a hard time understanding the logic there.

 

I suggest you read this piece by passport capital and see if you still feel the same way about Gold.

 

http://www.zerohedge.com/sites/default/files/Passport%20Capital%20Physical.pdf

 

I agree with both your statements about Buffet, as I explained earlier, but you have to do as Mr. Munger says, always gauge someone's statement based on their self interest. At this point in Buffet's career, the last thing he wants to see is a reversion to the gold standard.

 

For several thousand years, human beings tried many different forms of money and in the end always came back to Gold. You cannot trust human beings with the responsibility of issuing, and governing just how much money is "enough", it never works. Gold is not an investment, I would rather own BAC than GOLD. But I wish that my currency was backed by gold. And that is the argument we should all be having, where the pro's and cons could be argued based on points such as what Ericopoly brought up.

 

 

IMHO, the real question is not whether Gold or Silver or oil or diamond or whatever.  The real question is exchange.  You need a medium of exchange for goods and services.  It should be uniform, should not disappear, portable etc.

Historically, the problem was of storage without corrosion - iron, silver, bronze etc would not qualify.  You could put gold anywhere and not lose its quantity and hence value of exchange.

Then the problem became of weight - paper solved that technological problem. 

If you go back to gold, think what would happen to stored values at this point.  You would suddenly have balance sheets of everyone (everyone!!!) decimated (centimated or millimated).  When did humanity take such a decision ever!!!!  This is the intellectual reason leads me to believe that gold bugs are just nostalgic.

 

The technology eventually has to move toward a more portable medium of exchange.  Really, the challenge now is sending paper currency across (not talking about the bits of data that you send from bank to bank).  Can you really transport currency across great distance without really taking the risk of losing it - say theft, government confiscation, security charges?  (Think back to the currency sent to Iraq in containers.)  My best guess is that money is going to become more untouchable - wallets may become outdated in favor of a credit card holder or just a single number. (Parallels are interesting - think of shares and share certificates.) 

 

Extending those same thoughts, I also think that speed of e-transfers are partly to blame for the outsized balance sheets of central banks.  Back when money transfer from coast to coast would take, say a week, Fed could afford to have so much paper currency out there.  Relatively, adjusting for population and transaction volume, it may be outsized.  (I would love to read a doctoral paper on this subject.)

I would love to live in that future where intelligent people realize that value need not be touched, fondled, nursed, shining.  Instead,goods and services are seen as a multiplier of effort of a human being.  So much for my Utopian stream of consciousness.

 

[ERICOPOLY]

One more thing relating to your note that gold always causes deflation: In a fractional reserve banking system, gold would back the base money but not the broad money which would be created at the commercial bank level, hence the supply of money would still be elastic based on the growth of economy.

 

What if though, the foreign nations who currently worry about our debt load cash out of their dollars and walk away with the gold that is backing the fractional reserve system?  This isn't currently a fear because we're not backed by gold, but wouldn't it be the current fear if we were?  Isn't that why we left the gold standard in the first place?

 

 

[moore_capital54]

Eric, that is a very good point and here is my response:

 

For a nation to own excess US dollars to be redeemable in gold, they would have needed to earn those dollars via successful trade with the US. So if and when they decide to redeem their US Dollars, that is their prerogative and they have "earned" their share of the nations gold reserves through free market capitalism.

 

When the US would redeem the dollars for gold (foreign nation dollars) that would immediately contract the base money which would in turn contract the broad money, this would correct the excess (if any existed) created through fractional reserve. Loans would be called back until the base money supported the broad money based on normalized economic activity.

 

But this is exactly how the system is SUPPOSED to work. There are no free lunches.

 

Seshnath: I most apologise but I am completely lost on your logic. It appears you are describing the physical process that revolves around a medium of exchange and completely disregarding the purpose or fundamentals of how and why a medium of exchange should work.

 

Paper can be a derivative of gold, and so can electronic figures on a computer. I don't have a problem with fractional reserve banking either, which is how the broad money expands and contracts due to economic activity (booms and busts), I have no problem with the monetary base expanding when under stress either via a combination of a silver/gold ratio or due to annual increases through mine supply, but all that matters is that in the end, the monetary base is backed by gold or silver, so that human beings don't increase it at will to subsidize a lack of fiscal discipline or political ideology. This my friend, is a tax on savers, while rewarding debtors leading to a slowdown of civilization and prosperity.

[moore_capital54]

Eric one more thing, if you are still following :) as you can see the gold standard instills a discipline that would make it near impossible for a nation to find itself in the situation that the US is in currently. It was borne out of many trial and errors in government and economic theory.

 

Keynes experiment has messed everything up.

 

The silver lining is that everyone on this board is going to do a lot better than the average joe, as we can pretty much identify inefficiencies and allocate capital accordingly, extracting a return that over time should supersede even the rate of currency erosion (I hope!!).

 

The people who are getting screwed are the hard workers that save $10-30K per year and in a CD or Muni Bond, and when they retire have nothing to show for it, those are the people that are getting punished and there are tens of millions of them. We all know them, and have at least one member of our family in that position. They try hard, and do everything right and are constantly in the rat race. This was Keynes wet dream, to have them all chasing the value of their money, to keep the wheel turning, all for the sake of "aggregate demand", who cares about utility, consume consume consume!!

[Parsad]

Parsad, I stand by my comment that Mr. Buffet said this "tongue in cheek"  as did Munger when he said that people who made money on gold are "Jerks" in his address at the University of Michigan. Buffet and Munger have lived through the gold standard and they were all very much against the demonetization of gold and silver. This is all supported by facts and historical press releases from Berkshire Hathaway.

 

Here is the entire "tongue in cheek" comment by Buffett:

 

“So there are two types of assets to buy. One is where the asset itself delivers a return to you, such as, you know, rental properties, stocks, a farm. And then there are assets that you buy where you hope somebody else pays you more later on, but the asset itself doesn’t produce anything. And those are two different games. I regard the second game as speculation.

 

Now there’s nothing immoral or illegal or fattening about speculation, but it is an entirely different game to buy a lump of something and hope that somebody else pays you more for that lump two years from now than it is to buy something you expect to produce income for you over time. I bought a farm 30 years ago, not far from here. I’ve never had a quote on it since. What I do is I look at what it produces every year, and it produces a very satisfactory amount relative to what I paid for it.”

 

“If you took all of the gold in the world it would roughly make a cube 67 feet on a side. So if you took all the gold in the world, we could have a cube that went down there 67 feet… 67 feet high and that would be the whole thing. Now for that same cube of gold it would be worth at today’s market prices about $7 trillion. That’s probably about a third of the value of all the stocks in the United States.

 

Now, for $7 trillion, there are roughly a billion of farm— acres of farmland in the United States. They’re valued at about $2 1/2 trillion. It’s about half the continental United States, this farmland. You could have all the farmland in the United States, you could have about seven ExxonMobiles, and you could have $1 trillion of walking around money. And if you offered me the choice of looking at some 67-foot cube of gold and looking at it all day, you know, I mean touching it and fondling it occasionally, you know, and then saying, you know, `Do something for me,’ and it says, `I don’t do anything. I just stand here and look pretty.’ And the alternative to that was to have all the farmland of the country, everything, cotton, corn, soybeans, seven ExxonMobiles. Just think of that. Add $1 trillion of walking around money. I, you know, maybe call me crazy but I’ll take the farmland and the ExxonMobiles”

 

Some other Buffett tongue in cheeks:

 

“The problem with commodities is that you are betting on what someone else would pay for them in six months. The commodity itself isn’t going to do anything for you….it is an entirely different game to buy a lump of something and hope that somebody else pays you more for that lump two years from now than it is to buy something that you expect to produce income for you over time.”

 

“Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in a year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money, but the gold itself doesn’t produce anything.”

 

“[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

 

"I have no views as to where it will be, but the one thing I can tell you is it won't do anything between now and then except look at you. Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money and there will be a lot -- and it's a lot -- it's a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that."

 

Munger tongue in cheek:

 

"I don't have the slightest interest in gold. I like understanding what works and what doesn't in human systems. To me that's not optional; that's a moral obligation. If you're capable of understanding the world, you have a moral obligation to become rational. And I don't see how you become rational hoarding gold. Even if it works, you're a jerk."

 

Finally, just a reminder that during 1979-80, when gold last peaked and Buffett was very concerned with inflation and the government's printing press, he still did not buy any gold.  Returning to present day, he still has not bought any gold.  My thoughts are that his tongue in cheeks are his actual philosophical stance on gold.  I'm not going to argue with him!  Cheers!

[ERICOPOLY]

as you can see the gold standard instills a discipline that would make it near impossible for a nation to find itself in the situation that the US is in currently.

 

The US under the last gold standard faced a run on it's gold though -- due to worries over the nation paying the debts.  This is what I am wondering -- how does the gold standard instill fiscal discipline when we know it failed to do so the last time around?

 

I suppose I need to ask, how would the prior system need to be modified to prevent such failure if we go back to the gold standard again?

[seshnath]

 

Seshnath: I most apologise but I am completely lost on your logic. It appears you are describing the physical process that revolves around a medium of exchange and completely disregarding the purpose or fundamentals of how and why a medium of exchange should work.

 

Paper can be a derivative of gold, and so can electronic figures on a computer. I don't have a problem with fractional reserve banking either, which is how the broad money expands and contracts due to economic activity (booms and busts), I have no problem with the monetary base expanding when under stress either via a combination of a silver/gold ratio or due to annual increases through mine supply, but all that matters is that in the end, the monetary base is backed by gold or silver, so that human beings don't increase it at will to subsidize a lack of fiscal discipline or political ideology. This my friend, is a tax on savers, while rewarding debtors leading to a slowdown of civilization and prosperity.

 

Sorry I was not clear - looks like the morning coffee I was having didn't have the time to take. 

 

My point is that there is a technological reason historically why gold was a medium.  The obsession with this long history without regard to recent technological progress is what makes people assign arbitrary values to gold. 

Just think, if you were starting today at zero, without the legacy of metal and paper currencies, would you chose gold?

My other point is that unit denomination need not be called dollar, need not have any backing as long as it is limited.  Say, you take all the currency in the world convert it to dollars or gold or your favorite currency divide it by no. of people and call it 1 unit of "money" or whatever.  That can be your medium of exchange.  So, if you need food, send some units of "money" to somebody in exchange for it.  This is really the basic mechanism of any form of money.  You can link the unit of "money" to population - which means you don't really inflate except for the pace at which the unit travels through the system.  There is really no need for a physical presence to this unit, at all.  We are really almost there - you don't really get to see "your dollars" in the bank - all they do is send you a statement.

 

I will admit that gold has a value being a rare metal.  I know that gold occurs less frequently on earth than say copper or iron.  Instead of assigning cost of mining plus any profits supply-demand situation may throw up, a buyer today is paying an illiquidity premium since there are lot more hoarders.  I really think that this obsession with gold from marginal buyers who expect to be first out of the gate when it goes the other way is just what is skewing that value to levels that don't make economic sense. Having an atomic number 79 really doesn't have any special place to command in the periodic table of elements and logically, in the economic world.  Once you invert the logical questions about gold, you will find all the answers, really.

 

Probabilistically speaking, the two likely outcomes are:-

1. World goes back to gold standard in one form or the other - do you think gold that you buy will be protected?  First thing that any government will do is to confiscate all gold - like it did back in 30s.  It won't be of use to you.

2. World goes further away from gold standard - that is the scenario I am trying to explain above.  Gold would end up losing its premium as a historical obsession.  All you would find are gold jeweleries and other industrial uses.  You lose money.

 

When these are the high probability scenarios and your expected value is a loss, why would you buy gold?  And, did you really hedge any loss?

 

And both these scenarios are betting on the actions of governments run by politicians.  I think you should get the drift by now.

 

Having said all this, I am also admitting what Warren Buffett said recently, the US currency is the problem.  I don't like it a little bit how the fiscal issues are being managed there.  I recently wrote a piece in my blog:-

 

Compare this scenario against US Dollars (Feb 2011) -

Currency - 928.7 Billion

Reserve Assets - 134.7 Billion.

Value of reserve Assets hide a very important picture - Gold stock valued at 11 Billion is valued at $42.22 per Troy Ounce.  The value of gold in the market per troy ounce in Feb. was between $1,340 and $1,440.  Revaluing gold would add another 350 Billion to the reserves.  Still we have 485 Billion Vs 929 Billion of currency issued.  To achieve parity, Gold would have to go up double from this (no, I am not making a prediction).

 

USD at this point is a fiat currency without backing.  Essentially, it means that one of the arms of government has mortgaged future claims on its people.  To me that is clearly an inter-generational fraud.  Since I am not a US citizen, it is something I can do nothing much about; but may end up suffering with others around the world.

 

The issue of gold and the issue of USD are separate to my mind.

 

 

 

 

[moore_capital54]

Eric, Again, the way it instils discipline is that for a foreign nation to gain such a large percentage of the the host nations currency it would have to have been either through debt issuance or fair trade, hence the question should not be what happens when a foriegn creditor asks to redeem their cash in gold, but rather why the host nation owes so much to a foriegn nation in the first place.

 

Running up debts and deficits erodes the purchasing power of a nation, there are no free lunches.

 

Parsad, as we are quoting Buffet...

 

Will the real buffet please stand up?

 

http://www.berkshirehathaway.com/news/feb03981.html

 

"Over 30 years ago, Warren Buffett, CEO of Berkshire Hathaway, made his first purchase of silver in anticipation of the metal's demonetization by the U.S. Government. Since that time he has followed silver's fundamentals but no entity he manages has owned it."

 

This is as strong a statement as can be, he is telling you in simple english he purchased precious metals when they were demonitzed.

 

But anyhow, I don't believe in just quoting buffet or following every single thing he says, unless you are in his position in allocating $200-300B in capital. Most of us are not and need to generate superior rates of return to Buffet year in and year out.

[Mark Jr.]

I think at the end of the day, the most obvious harbinger of a gold bubble top is still notably absent: a buyers panic to get into it. I think it was Eric Sprott (or maybe Marc Faber) who recently observed that even at today's prices (this was a few months ago), global exposure to gold and gold investments (including mining stocks and ETFs) was something like 0.05%, where in previous gold tops it had risen as high as 20%. (Those numbers are from memory and prone to being off, but those were the ballparks)

 

Until my cab driver starts chatting up gold or I walk into the bookstore and it's all "Get rich now investing in gold", I don't think we're there yet. (Yes, there are gold ATMs, etc but they are still curiosities, not ubiquitous)

[ERICOPOLY]

Eric, Again, the way it instils discipline is that for a foreign nation to gain such a large percentage of the the host nations currency it would have to have been either through debt issuance or fair trade, hence the question should not be what happens when a foriegn creditor asks to redeem their cash in gold, but rather why the host nation owes so much to a foriegn nation in the first place.

 

I don't have trouble believing that attitudes would be different regarding the debt.

 

I'm just pointing out that even on the gold standard we as a nation couldn't help ourselves in getting in debt, which triggered a run on our gold.  It seems that based on our past experience, there is something else wrong in addition to whatever is backing the currency.  Driving off a cliff at a slower pace is still a negative experience.

 

[moore_capital54]

Eric again I must disagree, Nixon should have let nations exchange their US dollars for gold causing us to lose some of our gold on the base money level which would have in turn caused the broad money to contract,  in turn causing loans to be called in and the system would have corrected itself.

 

We would have had a delevering that would bring economic activity back to the norm, and would encourage domestic consumption as well.

 

A Nation with trade deficits is a nation that is losing its wealth over the long-term.

 

You see there are a bunch of things wrong right now, we truly are no longer competitive on a global basis, and have become lazy consumers that do not produce anything. Fiat money helped us to get to this point.

 

 

[moore_capital54]

Mark the figure is 0.6% of Total Financial Assets where historically it was as high as 2-3% for Mining Shares, and gold bullion backed the monetary base.

[Mark Jr.]

Mark the figure is 0.6% of Total Financial Assets where historically it was as high as 2-3% for Mining Shares, and gold bullion backed the monetary base.

 

Right then. I have terrible recall for numbers like that.

 

P.S great earlier post by you in this thread.

[oec2000]

as you can see the gold standard instills a discipline that would make it near impossible for a nation to find itself in the situation that the US is in currently.

 

The US under the last gold standard faced a run on it's gold though -- due to worries over the nation paying the debts.  This is what I am wondering -- how does the gold standard instill fiscal discipline when we know it failed to do so the last time around?

 

I suppose I need to ask, how would the prior system need to be modified to prevent such failure if we go back to the gold standard again?

 

Could a system where a truly independent supranational organisation, like the IMF (except not one controlled by the US), is given control of all member countries' gold reserves work?

 

I don't think the problem of a run on gold reserves is the problem with a gold standard - after all, with the current fiat money system, you can have runs on a country's currency and debt too. With a gold standard, foreigners can only withdraw that amount of gold that they have "earned" by running surpluses with the US (for e.g.) and no more. So, as long as a country regularly adjusts economic policies to prevent sustained current account deficits it will not lose all its gold reserves. On the other hand, with the current system, a confidence crisis can truly overtake the fundamentals of a country.

 

The problem with a gold standard is that it removes flexibility of economic policy from a country and can aggravate problems in times of economic weakness. The question we should ask, however, is whether the current replacement solves this problem or makes it worse by giving govts the power to let problems fester until they precipitate crises? For example, if Bernanke had known that he did not have a helicopter in the Fed hangar, would he have pursued a more prudent monetray policy in the mid-2000s (or Bush a less reckless fiscal path)?