Dylan Grice Explains Why He Likes Gold, And Why $7,500/Oz Makes A Gold Standard Possible

Tyler Durden's picture

Three months ago, there was some confusion when SocGen's Dylan Grice, one of the brightest big picture strategists out there, released a report profiling the long-term real return on commodities (which was zero), leading some to speculate he was bearish on gold and/or other precious  metals. Today, Grice puts the matter to rest with his latest Popular Delusions piece: "Why this commodity specific value investor likes gold." To wit: "In the hard sciences knowledge builds cumulatively. It propels the relentless growth in man’s ability to do more with less, which makes commodities such a lousy investment in the long term. Yet in the realm of social decision-making mankind is a fool, unable to learn the wisdom of posterity and doomed to repeat its mistakes: the first credit crunch occurred in the Rome of 33AD and the ancient Greeks lived with high inflation. Confidence in central bankers’ ability to learn from past inflation is as likely to be misplaced as it was in their ability to learn from past credit booms. Gold remains the cleanest insurance against such overconfidence." And confirming gold's very unique position in the investment pyramid, Grice's conclusion borders on the ontological: "Shorting mankind’s ingenuity isn’t a smart thing to do. But ingenuity isn’t wisdom. And shorting mankind’s ability to absorb wisdom … well, aren’t you silly if you don’t? With less of the technological risk you’re taking when you buy any other part of the commodities complex, gold is the oldest, purest and simplest way." It appears ever more are starting to agree with this perspective.

Grice's summary observations on gold, explaining why to so many the concept of precious metals is sufficiently inexplicable to be analyzed through the prism of religion:

I recently showed that the long-term real return on commodities since the 1870s has been zero (Popular Delusions, 15 December 2010), and so I am sceptical of long-only commodity investing. The history of our species has been one of adaptability and innovation, and I argued that to buy commodities was to go short human ingenuity. But some thoughtful observers - see Sean Corrigan profiled on zero hedge for a good example - questioned exactly how “ingenious” humanity really is. They suggest that shorting human ingenuity might not actually be such a bad idea!

This is a valid point and one that I want to explore in more detail this week. In the original note I explicitly excluded gold from my analysis, as I have done in subsequent writing. But I have never properly explained what, on the surface at least, appears to be a stark contradiction: how can such a commodity-sceptic as I be so comfortable owning physical gold? What follows is such an explanation. I’ll let you decide whether it’s any more than an elaborate attempt to relieve a particularly nasty case of cognitive dissonance.

Gold is not like other commodities, and other commodities are not like gold. That difference is central to the reconciliation to come. But it is actually much more. It lies at the heart of the absurd contradiction innate to the human condition: how can a species as capable of the creative resourcefulness embedded in space travel, wireless communication,  genome mapping, Viagra, be at the same time, so hopelessly incapable of learning past wisdom, and apparently doomed to repeat past follies?

Previously, when we discussed Bernanke's hubris when testifying in Congress that it would be impossible to get a gold standard back because there is not enough gold, we countered with the simple argument: just raise the price of gold. Indeed, as Grice points out (again) at $7,500/ounce all the dollars in circulation would be backed by gold.

And Dylan brings the thesis full circle: gold is nothing but insurance, but not so much against deflation, inflation or the end of the world: it is insurance against pure human hubris, such as that exhibited by Central Planners, pardon, bankers, each and every day.

Two thousand years ago, Marcus Cicero said “any man can make mistakes, but only an idiot persists in his error.” By such logic our species is idiotic indeed. For our ability to pass knowledge down through the generations applies only to the physical sciences. In the realms of the social decision making, where humility and realism are so often the dupe of hubris and self-delusion, each generation is condemned to relearn the mistakes of generations past.

The abuse of political power, wars and popular uprisings are as prominent in ancient history as in today’s newspapers. In the 5th century BC the helot serfs tried in vain to overthrow their Spartan masters. Today the Libyan rebels’ struggle to topple Gadaffi may be going the same way. Harry S. Truman once said “there is nothing new, only the history you don’t know.”

Financial history is no different. Indeed, it is the systematic tendency towards precedented folly which is such a fascinating feature of our financial heritage. During the South Sea Bubble, as the stock of the South Sea company entered stratospheric proportions, John Martins of Martins Bank bought stock at the ludicrous price of £500 and justified it thus, “when the rest of the world are mad, we must imitate them in some measure.” Nearly three hundred years later, the then CEO of Citigroup, Chuck Prince, echoed identical idiocy with the now infamous utterances “ … as long as the music is playing, you’ve got to get up and dance.”

Tacitus refers to what may be the first recorded credit crunch in 33AD. An edict on usury from the Emperor Tiberius forced money lenders to call in loans and borrowers to sell property at distressed prices, during a “great scarcity of money.” Only when the emperor advanced 100m sisterces to distressed debtors to borrow for three years without interest (the world’s first ZIRP) did the crisis pass. So the credit crunch of 2008 wasn’t the first, and it won’t be the last. Yet only a few years ago we were told that financial crises were a thing of the past.

Central banks knew better. They’d learned the lessons from the past. But history shows that in the realm of social decision making such confidence is rarely warranted. Hubris plays the lead role in all great financial tragedies.

And what is an inflation crisis if not a financial tragedy? Today our central bankers are as confident in their ability to control inflation (Mr. Bernanke claims 100% confidence) as they were in the soundness of the financial system in 2006. Yet history suggests they shouldn’t be, for inflation goes back almost as far as we do. In the ancient Greek comedy, The Frogs, written in 405BC, Aristophanes writes that “the full-bodied coins that are the pride of Athens are never used while the mean brass coins pass hand to hand”. His reference to Gresham’s law predates Sir Thomas Gresham’s first observation during the medieval inflation of Henry VIII’s England by around two thousand years. As the play was written during the closing years of the epic Peloponnesian Wars which would have stretched the government’s budget, we can assume that Aristophanes and his audience witnessed inflation first hand.

Like credit crunches, there is nothing new about inflation crises. It’s not something which happened in the past but which we now understand well enough to ensure it never happens again, any more than systemic banking crises were. Yet when we talk about past inflationary episodes, whether in classical times, medieval times or industrial times we read of the same two villains of the peace each time: financially pressured governments and the politicised issuance of money. With the festering off-balance sheet liabilities threatening public sector solvency throughout the developed world, and central banks little more than fiscal puppets and economic cheerleaders (with the exception of the ECB, for the moment), we’re set to reacquaint ourselves with those villains in the flesh.

Shorting mankind’s ingenuity isn’t a smart thing to do. But ingenuity isn’t wisdom. And shorting mankind’s ability to absorb wisdom … well, aren’t you silly if you don’t? With less of the technological risk you’re taking when you buy any other part of the commodities complex, gold is the oldest, purest and simplest way.

Brilliantly put.

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buzzsaw99's picture

$7.5K? $7.5M is more like it, Eventually an ounce of gold will be worth a billion clownbux.

LRC Fan's picture

Yeah, reminds me of all these analyists who exclaim "I see gold going AS HIGH AS $1,600 this year and silver UP TO $41 or even $42 per TROY OZ!!!!!!!!!!!"  Lol. 

Harlequin001's picture

What a complete load of total and utter bollocks...

Harlequin001's picture

I live in a different timezone to the US which means that I go to bed when the US goes to lunch. I therefore miss much of the later discussion and commenting the following morning is old hat. How many of you re read old articles?

This morning I saw fit to comment on the article about interest rates and gold. Would be keen to hear any objective and intelligent discourse on the subject if you're interested either here or in the article, which I will check on periodically...


schoolsout's picture

the system here for commenting on a reply to your comment or whatever is a little lacking.  Makes it hard.

grey7beard's picture

>> the system here for commenting on a reply to your comment or whatever is a little lacking. 

So it's not just me.  Good.

dark pools of soros's picture

I complained and the sys admin that i don't see around here anymore said some crap about it makes it better for you to read all the comments or some such nonsense..  the old site would send you emails on just the replies..  here you have to track the whole stinkin thread and use your search commands and come back and check over and over..   total waste and also why we now have 90% drive by comments and less discussions

Harlequin001's picture

I know what you mean, I've tried the filters and resort but they don't work.

I posted this because of the time issue I have with full discussions on various matters. The issue being that many ZH'ers seem to visit comment for a short while and move on. By the time I get to see the article in the morning it's fully commented up.

It's difficult to have a proper discussion in very few words because some of the issues in play are quite complex.

LowProfile's picture

Note you can link to a particular comment http://www.zerohedge.com/article/dylan-grice-explains-why-he-likes-gold-... (click on the number link under the date/time).

I suggest you send the above link to tips at zerohedge dot com.

BigJim's picture

I tend to keep tabs open of ongoing discussions, and then update the page with <F5>, then read through the various replies to my posts by searching with <Ctrl-F>.

Bit laborious... there's probably a better way but I haven't given the matter any thought til now.

Most tabs get closed after a couple days - there's just so much shit coming down the pike now, my machine would run out of memory if I kept open all the tabs I wanted to.

dark pools of soros's picture

there isn't - that's what we do.   unless they go back to the old site or figure out the features better

Temporalist's picture

Here is a suggestion for searching for replies to your comments.  After loggin in click on "My account" on the left nav bar.  Open any post that you've commented on and want to check for replies.  Do a "Find" on page (in Firefox Ctrl+F opens the Find command) and type in your username.  You can search the whole page for your comments in just a few clicks.  If there are more pages of posts get to the end and click next or go to a specific page.

That is the fastest way I've found so far to search for replies to comments.

JLee2027's picture

Yeah, reminds me of all these analyists who exclaim "I see gold going AS HIGH AS $1,600 this year and silver UP TO $41 or even $42 per TROY OZ!!!!!!!!!!!"  Lol. 

I don't understand those predictions either, as money is being printed much, much faster than that and price suppression efforts are failing. Eventually we hyperinflate.

schoolsout's picture

CNBS has this from Grice


Buying Gold = Shorting Mankind's Wisdom: Analyst

Commodities are not a good investment over the long term because of man's ingenuity in discovering new ways to use existing resources or new technologies to replace depleting ones, according to Dylan Grice, a research analyst at Societe Generale.

buzzsaw99's picture

Is that the same soc gen that had the "rogue trader" who caused the bernank to cut the ffr by 75 bps?

This is the horse and the hound and the horn
That belonged to the farmer sowing his corn
That kept the cock that crowed in the morn
That waked the priest all shaven and shorn
That married the man all tattered and torn
That kissed the maiden all forlorn
That milked the cow with the crumpled horn
That tossed the dog that worried the cat
That killed the rat that ate the malt
That lay in the house that the Bernank built.
Eagle1's picture

Love it! Takes me back to my childhood memories in the late 40's and early 50's. Sadly, those days are long gone and so is our country in the not too distant future. I pain for our grandchildren who will live in the midst of the turmoil that is coming.

Dan The Man's picture

gonna teach that to my daughter when we're skipping...just a phase

Caviar Emptor's picture

He was against it before he was for it.

Shorting mankind's "wisdom" is the essence of Jevon's paradox, is the essence of economic cycles, is the essence of free markets......

BigJim's picture

Wow, nice selective quoting there by CNBS. Anyone sheep reading just the headline would think the conclusion was anti-gold.

schoolsout's picture

That's what I was thinking

A Texan's picture

Doesn't this estimate of the price necessary to back every dollar with gold assume that the US Treasury ACTUALLY HAS THE GOLD?  As in all 261.5 million troy ounces, some 8,200 tons.  No one (apparently) has audited Ft. Knox in about 50 years, so how do we know it is still there...and if it ISN'T, then we'll be looking at far more than $7,500/oz.

gosseyn's picture

No, this estimate doesn't rely on the U.S. having the gold.  Did you read the last sentence immediately above Grice's chart? 

"Indeed, as Grice points out (again) at $7,500/ounce all the dollars in circulation would be backed by gold."

Dr. Richard Head's picture

Smells like $500 silver to me if this were to transpire.  FU-JP

False Capital's picture

Yep. $468.75 assuming a 16:1 ratio :)

cowdiddly's picture

Quit Pumping dang it. Im still trying to buy more. BTFQ (Buy the f-ing quiver). Every time I look at a Maple I feel like busting out in the Canadian National Anthem.

Long-John-Silver's picture

Today's spike is tomorrows dip

falak pema's picture

At that price my grandmother would sell all her teeth fillings...by proxy, from her grave...as her sole inheritor I would sanction that.

Dr. Richard Head's picture

The government will be willing to provide her assistance in the FEMA camp.

cowdiddly's picture

I got some needle nose pliers and some whiskey. Where did you say your Grandmother lives?

tired1's picture

Might give grandma a shot of that whisky, too.

BigJim's picture

I'm sure your grandmother doesn't need them now.

Cognitive Dissonance's picture

As long as the financial masters of the universe are able to distort the minds perception of how the financial universe works and fiats true value denominated in sanity (3% of what it was worth 90+ years ago) the price of Gold will never be allowed to reach its real value. Never. Not so much because it is being suppressed, which it is, but because of the vast number of ordinary Joes who support the fiat by using it.

Notice that nearly everyone here on ZH that believes that Gold should go much higher, of which I am one, understands that the system must break down, even if not fully, in order for this to happen. So long as the fiat alchemy can me maintained Gold will have a tough row to hoe.

But I have plenty of time on my hands. They must keep the plates spinning. All I need to do is wait them out while remaining above water, not an easy task but easier than theirs.

Long-John-Silver's picture

Every Fiat currency throughout history has attained zero value. The US Dollar will not be an exception.  It will be backed by Gold and Silver again or it will disappear as all others have.

Cognitive Dissonance's picture

I agree. The system will eventually collapse or morph into something else that instills in the public some sense of value. PMs may or may not be part of that equation depending on who is in control and how the new system can benefit those in control.

But, knowing that the financial elite will have their asses pulled from the fire by any new system (history shows this to be the case every time) usually through an uneven or unequal exchange rate (the better one for them, the worse one for 'us') how exactly do we convert our PMs back into whatever currency is used in the new system that retains the majority of it's pre-collapse value?  

Sean7k's picture

I recommend having enough of a cushion in fiat to handle the transition without resorting to your physical. As the wealthy use gold just as we do, that exchange rate will increase in value once their gold needs to be at it highest value. 

The wealthy always have more reserves- I recommend a similar strategy.

Cognitive Dissonance's picture

I agree.


We ZHers are recommending to average Joe's to purchase Gold and Silver. These average Joe's have no capability to accumulate substantial reserves. Yet we require them to accumulate PMs in order to leverage the system apart.

Are we not using people just like the fiat system is if there really isn't a way for them to keep their heads above water without using their PMs during the worst of the crisis to survive and most likely at the worse time for them?

It's a philspohical and moral question that I ask.

Sean7k's picture

Personally, I would "recommend" to average joes to use silver and gold to game the fiat system for short term gains. Hopefully, they can acquire enough gains to buy and put away wealth. This would require they have the ability to time the market to some degree- not likely, but it is an opportunity. 

More important, to the average joe: never invest in something you don't understand.

Cognitive Dissonance's picture

But we are not telling people to 'invest' in PMs (at least I am not) but rather to preserve some of their 'wealth' in PMs because the system is collapsing. Is not FRNs promoted in the same manner when it comes to 'long term' investments, as a means to preserve (and grow) wealth by using your FRNs to purchase stocks, real estate etc.?

Sean7k's picture

You know CG, we can only provide information. People must make up their own minds and investment strategies. The system is not collapsing, it is trying to defend itself and evolve past a disease that attacks all fiat currencies. This will allow for a greater and greater transfer of wealth from the lower class to the Elites. 

Gold is a way to protect yourself that is simple and easy to deploy. However, it has some caveats- especially the change over if the system does break down. 

The promotion of other investments whose value is closely interlinked to fiat currency is another choice. A dubious one in my opinion, but a choice that can garner respectable gains PRICED IN FIAT. If the currency fails, then the investment will reflect that. It could be further devalued through bankruptcy, bond haircuts, or government theft through backroom deals (GM, etc).

To buy any investment, based on the imminent collapse of the US economy, would be naive and show a total lack of understanding of the resources and capabilities of the ruling elites.

This could go on for twenty years or 2 months. You could have huge dollar gains, but zero wealth gains in the wash out.

Personally, I look at it this way: the US economy is the largest in the world. We are a productive people with a sizeable amount of wealth. America will not collapse into a heap. It will slowly degrade, slowly impoverish, change perceptions and dreams of living standards. It will do what europe has done- fall to a level of sustainable wealth it can afford to maintain through tax policies that fail to incur rebellion. It will garner greater and greater degrees of control that fail to incur rebellion. It will be careful measured, tested and rolled out in ways the people always choose the status quo over revolutionary change.

Gold and silver may provide a way to better determine your eventual class status. It will always return to the those that understand it's true value and proclivity to purchase liberty. 

Cognitive Dissonance's picture

You know CG, we can only provide information.

Yup. Something about bringing a horse to water. I see so many here on ZH frantic with the idea that they must wake up their friends, family and neighbors. We can only trickle knowledge upon them. Only they can decide to absorb it. However, we must continue to trickle even when it appears hopeless.

The key is to accept that we are powerless in getting them to accept our message. Ironically once we reach this inner peace and are no longer forcing the knowledge upon the listener, suddenly those we are talking to will begin to listen because they will no longer be frightened by us, the messenger.

I was only trying to provoke thought and discussion on this thread and I wasn't attacking you. I hope you see that.

Sean7k's picture

Of course. I was only providing some additional ideas to push the discussion. I think the distinctions are important, especially for those new to pm's.

Cognitive Dissonance's picture

I agree. Many years ago when I was beginning to wake up I wish there had been somewhere like ZH for me. It would have made the transition from LaLa land to some semblance of reality less jarring. Or at least less lonely.

The problem for most newcomers is the violent whipsawing between finally seeing some sane talk and deep depression. Talking openly and honesty is the only tonic for manic behaviour as we battle our inner cognitive dissonances.

Thank you for the poltie and informed discourse.

BigJim's picture

Maybe... but can you think of a better alternative?

Cognitive Dissonance's picture

No I can not.

I think it all comes down to the concept of "informed consent" and whether we have a duty, or maybe to what degree are we obligated to inform them in order for them to offer their informed consent.

I can tell people anything. If they have no desire to learn or if they only wish to gain advantage where does my duty begin and end? Again, just asking tough questions. I don't pretend to have the answers. That's the advantage of being an armchair pundit. :>)

Captain Kink's picture

But they make it through because they have something of value that they can use for trade.  Better than FRN toilet tissue.

Cognitive Dissonance's picture

So PMs aren't wealth preservation, but simply a vehicle to get to the other side where they can be converted (either by barter, trade or conversion back into some type of currency) into something that is usable at that time?

It's one thing to bring to the other side of a financial system collapse enough PMs to supply you with food etc for a year or two, another entirely to bring over enough wealth to last 20 or more years. What are we talking about here, survival for a year or two or continuation of a life style similar to what you had to start with? What about those who are retired or near retirement? How do they carry their life savings to the other side and then convert the vehicle (PMs presumably) to whatever is being used on the other side?

Again, just asking questions.

Dr. Porkchop's picture

An idea that has formed itself in my mind is that this may take more than my lifetime. The metals I accumulate now, may not reach their true value until much later. The money changers may hang on and come up with new schemes, or they may collapse, only to have what follows them be a climate in which moving out of metals is unwise, or even unsafe.

The idea is that I may be part of a transitional generation. The generation that lays the foundation blocks of the great cathedral that may not see completion in my time. What to do then? You must build and store wealth that can be passed on, and try to educate the next generation to be wise.

DoChenRollingBearing's picture

+++ Dr. Porkchop!

Thinking ahead, putting down assets that will be good for a long time for our descendants.  Even if gold is not worth what it ¨should¨ be now, it will (likely) be worth so later.

Your idea of course can be expanded to include NOT consuming, and using those savings, in a variety of asset forms ideally, for your children and grandchildren.

Nacho.Libre's picture

CD, can you take this topic and start a discussion in the form section.  I'd like to discuss it in more depth also, but updating and searching the comments section is difficult. 

Come back and post the link so all those interested can join.