Pork bellies are where bacon comes from. If they just called them bacon futures, the price would double overnight, and there’d be a shortage by morning.
^ LOL
Pretty cool indeed. ^^
That’s part of my basic question.
If an investor’s purpose in gold is a stable store of wealth during a 1 in 300 year type event, is “electronic gold” really that safe? Are people currently selling more gold than actually exists (like what is done in the currency world with “money multiplier” at banks)? What happens when there is a reserve currency battle and sovereign entities call their gold? Does the individual get screwed? I don’t know anything about metals, just thinking and asking questions.
I know the lazy answer is “yeah but if that happens everyone is screwed anyhow so it doesn’t matter”. That kind of thinking doesn’t interest me though.
That’s outside of the hypothetical question though, I like to stay ninja focused.
Everything ends, all societies end, and all currencies eventually blow up. So we can say the dollar eventually gets blow into oblivion with 100% certainty, it’s just time. The human reaction is “yes but it won’t happen now”. Every generation says that untiil it eventually does happen now. 
We can analyze the cash flows (finance 101). We can run the USGov cash flows out and we see they don’t work. They don’t work because the scenarios required to make the cash flows work are impossible. That means eventually it is either default or hyperinflate. Best case I guess “orderly” default.
Yeah I know people say it’s really super complicated and there are all these options, I just don’t see it. Things get real simple real fast when creditors don’t want to credit anymore. 
You cannot possibly know this.
… only a gold bug deals in absolutes
I second this recommendation.
If you believe that gold and precious metals will be accepted as currency after fiat currency collapses, you will want to hold mostly small denominations. Why? The grocery store may accept a 10 oz gold bar as payment, but they will likely give you change in fiat currency (which you do not want to be stuck holding).
Well, you’ve argued the argument for holding physical gold (temptation to print our way out will be overwhelming, inflation will run out of control, gold is a real portable asset, but paper gold is subject to manipulation). It’s not a bad argument, but it’s not as certain as all that.
First of all, inflation is not the same as hyperinflation. I could easily see that the government simply allows inflation to run at a higher pace (say 5%) and that may be enough to solve problems or put them off for another generation. If inflation runs at 5% or even a little more and is stable, stocks will also be inflation-protected and have upside from productivity improvements. Real estate will do well, as well.
Secondly, if the government defaults on debt, it’s not at all certain that hyperinflation will result. We saw hyperinflation when Latin American countries defaulted on sovereign debts and then printed to keep the doors open, but those debts were not listed in the country’s own currencies. If they were, the hyperinflation would have made it easy to pay and it would not have been necessary to default. Instead, because the debt was in a different currency, it took more and more national currency to repay debt.
If the US were to default in a way where Treasury holders could really expect not to be paid back (as opposed to the default threat this time around, which was simply about not being paid on time while the government twiddles its thumbs), the problem would not be inflation, but deflation, since the credit system would either stop or become so pricey that businesses would shut down. Under that scenario, the price of all goods would plummet, and so would gold. One might be able to figure out an argument about how gold might plummet less than other things like stocks and real estate, but the irony here is that in a default situation, the best thing to have, probably, is cash.
Countries (including the US) have also made it illegal to own gold in the past, and if we really get to crisis conditions, and financial repression is used on all assets, and not just Treasurys, there is no reason to think that this can’t happen again. The last time it happened in the US, the problem was deflation, not inflation, but you can see why inflation could trigger this sort of thing. You might say “well, I have the gold in my basement and no one is going to take it from me because I own some guns too,” but 1) the government will know you bought it, most likely, 2) you might find yourself in jail, and 3) you won’t find anyone you can trade it to in anything but tiny quantities, because they aren’t allowed to own it either. You can perhaps have it in a bank in another country that you hope won’t cooperate with the US, and then trade paper gold certificates about gold that is held far away, but that undermines the argument for physical as opposed to paper gold.
I’ve been thinking for a long time that the macro scenario has been good for gold since the early 2000s, and it’s been kinda painful for the last year and a half for gold hoarders. Janet Yellen’s likely Fed appointment is something that is probably a good thing for goldbugs, but I’m not sure if it’s as good as you think it will be, because Yellen is not about turning the press printing on full blast forever - she is simply about waiting to see inflation actually tick up or unemployment to come down before putting the brakes on QE. People have been saying that hyperinflation is around the corner since QE started years ago and it’s barely at 2%, which is still low even by normal historical standards. Where would that 2% be instead if it weren’t for all that printing? The challenge is that everyone is scared by the debt (both public and private) that needs to come down and so no one is spending, so none of that printing has been able to get money velocity to rise (cue Ray Dalio’s “Beautiful Deleveraging Argument”).
So the real question is whether money velocity will rise rapidly or slowly in the future. If it rises rapidly, then there is a danger of high or even hyper inflation. If it rises slowly, then there is the opportunity to cut QE types of things to counteract them.
Finally, other central banks will likely want to diversify away from the dollar into other reserve currencies, but there really isn’t another option. The Euro? Not likely? The Yuan? Possibly, but I think China needs to reassure the world that it will prioritize rule of law, not to mention make its currency fully convertible. Australian or Singaporean dollars? Intriguing, but there just aren’t that many of them out there to use. Gold is one of the options, but the quesition is to what degree this has already played out. I think there is still some more to go, but I don’t see it as clear an option as it used to be, because the US economy is still the best of a bad batch, at least until China becomes more open and trustworthy as a reserve currency.
So if you don’t have some gold already in your portfolio, as the world readjusts to increased currency uncertainties, it probalby does make sense to have some, but I wouldn’t be holding gold as disaster insurance. The disaster could easily be deflationary, which makes gold crises plummet, and you are not increasing real purchasing power at all while you are waiting for the end of the world to happen and praying that it comes on your watch.
Err. These are really extreme cases that we are talking about. SPX can probably fall 80% or more without all currencies becoming worthless and us having to resort to gold as currency. Gold might be a decent store of value in the scenario of say, 40% devaluation of USD, but even this would still be far removed from total failure of global finance. I also take physical gold to be a safety storage, not something you would put in your pocket to pay for groceries. That is, you would hold gold because you think, in the event of a 10% devaluation of USD, your gold holdings, which would not have depreciated, will increase in value by 10% in USD. Even if the bank holds your gold as collateral in a hyper inflationary environment, you would probably still withdraw money from the bank, then run over to the grocery store and pay with cash. 10 oz gold bar is worth like $13,000 and would buy quite a lot of groceries.
I was watching the Walking Dead last night and I thought, “you know, these guys could really use some gold.”
Inflation is currently… barely at 2%
http://www.pricestats.com/us-series
MIT billion prices project: http://bpp.mit.edu/usa/
Makes sense, people don’t necessarily have change for a 1kg gold bar.
Excellent post.
It’s really an interesting topic in that it’s macroeconomics, currencies, politics, psychology, and financial chess all in one.
On inflation, yes if they can control inflation, then maybe over the long-term they can sneak their way out of the debt without anyone noticing, or caring. Just not sure people are in control of such things, stuff happens in life, and things get out of control quick. Plus even if they can control inflation and things start looking good, don’t they just become overconfident and double up on the reckless practices that got them there? Sub prime for example would have continued until it blew, people who think they are invincible (USA) don’t ease up when they catch a break.
On the current 2% inflation; if the government issues that number, and the govt has every motive in the world to make it be a low number, do we believe it?. But you raise the very interesting question, if it is a real number, what would that number be without the printing press?!
Reserve currencies; this change happens slowly over time. China and the rest of the world keep setting up new swaps where they can cut the US and the dollar out of the loop. China buys up gold to position itself. Maybe we go to a super-sovereign currency. Given a long enough time frame something happens here, we just don’t know when or what. But I think the time frame will be shorter than people think.
Scenario – US defaults straight up, thus no hyperinflation, deflation, gold crashes. That one is interesting, haven’t thought it thru, and don’t really understand it. In a default foreign credit dries up, but the govt is still spending 3T and only makes 2T, they can’t borrow, they won’t take their medicine, don’t they have to print? Frankly I don’t know anything about deflation, there’s probably stuff I’m missing. I just don’t understand the series of events that puts the US in deflation [default --> no credit --> ??? --> deflation]. Help a brotha out, I skipped this chapter in school.
I think of gold as being stationary, it’s actually the dollar changing in value. So when the price of gold goes up, it’s really just the dollar becoming less valuable. Deflation would be the dollar becoming more valuable, but it’s hard to imagine a gold bar not being able to buy you a significant amount of goods?? Is there is historic example of a currency becoming super awesome and gold becoming crap?
Holding gold, laws, etc. – I’ve already arranged my situation outside the US, so I don’t know that the US would have any visibility on my gold, and there’s Swiss accounts (historically they don’t tend to sell people out). None of my assets are in dollars anymore, mostly in KRW. But what happens to won? Nobody knows.
That’s the thing, when I step back and look at the whole thing currencies just seem so flakey. Seems like anything can happen (especially in our current world economic environment and electronic system), thus becoming interested in holding a decent % in physical, like gold, land. No gold at the moment, probably going to do a chunk, but not go crazy with it.
Wait, what?
Reading your posts I got the feeling that you don’t actually have any basis to believe that “anything could happen” but you kinda wish for it.
You may be better off in the “psychoanalyst forum”
Really? USD is has already basically gone to zero against gold since the 1960s. And of course it’s accelerated since coming off the gold standard. What do you think will change a continued decline? You think conditions are right for a USD comeback? Gold has outperformed the s&p since than which is remarkable considering there is no income yield on gold.
I’m feeling optimistic today. Instead of talking about collapses, how about we talk about what’s needed for stability? Why are Russia and China hoarding gold? Or all emerging market central banks for that matter…
All this talk about is gold money…of course it is. There are only two assets on earth that a foreign central bank can own to declare to the world their own fiat is backed by something tangible - USD and gold. And, the position of USD in the world is waning while gold is waxing - what does that tell you?
So, while we can all sit around and discuss whether there’s any intrinsic value to gold the people that matter have already placed their bets. At the root of everything fiat there is gold. Gold both creates and defends against fiat. Go figure…
Please tell me such a forum exists. I have been vastly bored by the correspondence that has lingered around this place lately.
so many indians and chinese buy gold. i remember a friend from hong kong told me there is a tradition to give your kid a gold coin for every birthday.
The Indian wedding season drives a huge amount of demand too.