Copyright 2015 John T. Reed
I laughed out loud this morning while eating hot cakes alone at McDonalds. The reason was the headline on Jason Zweig’s column in today’s Wall Street Journal: “Let’s Get Real About Gold: It’s a Pet Rock.” Google that title to read it.
At the FreedomFest a week ago I was talking to an exhibitor at his booth. He mentioned some sisters. My blank look told him I never heard of them. “They’ve been famous in gold circles for decades,” he explained. “I’m anti-gold,” I explained back. He coldly said, “I have nothing more to say to you.”
That’s not “how dare you insult by pet rock” behavior. That is religious extremism.
And indeed, Zweig says that in his column, too.
“It is time to call gold what it is: an act of faith. ‘Faith is the substance of things hoped for, the evidence of things not seen’.”
He also said, “Recognize, too, that gold bugs—the people who believe in the yellow metal no matter what—often resemble the subjects of a laboratory experiment on the psychology of cognitive dissonance.” Well put.
The true value of gold?
Zweig says it is impossible to calculate the value of gold. Actually, I think you can analyze it a bit more than he suggests.
There are two market segments for it: industrial uses including electrical, medical, and jewelry, and hedge against inflation and at any given moment, the highest common denominator among the two sets the market price. The industrial users have to match the price set by the gold bugs to buy it and vice versa. So the price of gold is a two-layer cake: industrial use value plus fear-of-inflation value. When fear of inflation goes away, that layer totally disappears.
I also think it’s useful to look at the adjusted-for-inflation, long-term price of gold. That number is $642 per ounce in 2011 dollars—probably about the same in 2015 dollars. But that price is mostly determined by the religious zealotry of the gold bugs and the running hot and cold of the “independent, undecided voters,” and the “sunshine gold bugs and the summer inflation” fearers.
I disagreed with one paragraph in Zweig’s column. He mocked the notion that “…massive money-printing by central banks hasn’t ignited apocalyptic inflation, that doesn’t mean it won’t. That means it is more likely than ever to happen—someday.”
Actually, that is correct, when you combine the money-printing with the projected growth of entitlement and federal employee/retiree spending and the near total inability of politicians to stop themselves from ever more deficit spending. To believe otherwise—apparently Zweig’s position—is to believe that there is no limit to how much government’s can borrow to pay current runaway expenses. That is not mere cognitive dissonance, that is insane. That’s Paul Krugmanesque. It’s Greek.
Gold was not an inflation hedge when needed in the past
Zweig only touched briefly on what I think is the main issue: gold simply did not play its purported role during past episodes of hyperinflation. Zweig says, “If the world goes to financial hell in a handbasket, you wouldn’t lug gold ingots to the supermarket so you could stock up on canned goods.”
Actually, one coin would be more than enough. They currently sell for $1,150. But we don’t need to discuss it in terms of “wouldn’ts.” There is high inflation right now in Venezuela and Argentina, and gold is “not a factor” to quote one expert who lives in Argentina.
You can read a bookshelf full of first-person accounts of the hyperinflation in Germany and Austria in the early 1920s and almost never see the word gold—at least in the context of anyone being glad they owned it. What they talk about are foreign currency and barter. Gold, ultimately, is just a barter item, and a lousy one. My book How to Protect Your Life Savings From Hyperinflation & Depression, 2nd edition has a chapter on barter with a list of the inarguable characteristics of the ideal barter items. According to that list, gold sucks.
See my article on the disadvantages of gold as an inflation hedge for a better explanation than Zweig’s about why gold is a lousy hedge against inflation.
I, too, discuss gold bugs, the main thrust of Zweig’s column. But that is the least of my points in my article. The other points are all inarguable disadvantages like its being taxed at a punitive rate, having been forcibly taken in 1933, and so on.