Must Read: Oaktree's Take On Gold - Howard Marks Discusses All That Glitters

Tyler Durden's picture

The topic of Howard Marks' latest letter is gold. The Oaktree Chairman presents one the better comprehensive pieces on the precious metal, laying out both the pros and cons. Presenting the current broad schizophrenia when debating the value of of gold, Marks, in a comparative allegory to 1952 opinion of Noah "Soggy" Sweat on whiskey, Marks states: "I have no doubt: gold is the ideal investment"...yet..."Gold has no financial value other than that which people accord it, and thus it should have no role in a serious investment  program. Of this I’m certain." Arguably one of the better two-sided presentations on gold's true value, we are nonetheless surprised that Marks did not reference the opinion of Dylan Grice (and others before him), who analyzes the price of gold in terms of the global monterey supply, which can be read in its entirety here.  Nonetheless, as Marks is always one of the most thoughtful observers on markets, this piece is a must read for everyone.

All that glitters (pdf)


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cocoablini's picture

So the US dollar is accorded a value, and we hoard those as well.
Newsflash- all money is fiat. Gold and silver is fiat. Credit is fiat. Anything that acts like money IS money. Those can be derivatives, home equity, gold and little pebbles from the Loch Ness.
In defense of gold and other hard assets like real estate, at least you get something.
Unlike the fiat dollar, which is a total joke foisted on the world by banksters.
When the shit hits the fan, guns are going to have more value than gold. My BBQ has more inherent value to survival than gold.
Gold is the absolute last stand for fiat money- money being a unit of labor or barter storage.
Gold is the last firewall- and as such is the perfect storage vehicle for credits and barter.

Bearster's picture

I hope that was a type where you said gold and silver are "fiat".

Fiat means force, and there is certainly no gun aimed at anyone to hold or value or use gold.  Unlike paper, where one MUST accept paper as payment for all debts, whether one wants to or not.

DosZap's picture

Fiat is from Latin, and its meaning is "let it be done".

As for Fiat Money;

The term fiat money is used to mean:

  • any money declared by a government to be legal tender.[1]
  • state-issued money which is neither legally convertible to any other thing, nor fixed in value in terms of any objective standard.[2]
  • money without intrinsic value.[3]

The term derives from the Latin fiat, meaning "let it be done", as the money is established by government decree. Where fiat money is used as currency, the term fiat currency is used. Today, most national currencies are fiat currencies, including the US dollar, the euro, and all other reserve currencies, and have been since the Nixon Shock of 1971.

Diogenes's picture

I thought they called it Fiat money because in value and rate of depreciation, it resembled a rusty Italian car.

Herd Redirection Committee's picture

So he doesn't think the political system exists purely to serve special interests, i.e. a corporatist Oligarchy?  No thanks, Howard, I'll pass.

Yes, Gold is a religion.  There is a reason Kings used to wear crowns made of gold,  it has tremendous visual impact (esp. in bright sunlight).  But gold also subconsciously reminds us of the sun.  Sun worship is analogous to Gold worship.

Gold has all the properties of money (transportable, divisible, does not erode meaning it by definition stores value) but how do you put a price on 'shiny' and reminiscent of the sun?  Throw in its scarcity, and you have gold's intrinsic value.

No one is saying gold's intrinsic value is infinite.  What is being argued is that gold's intrinsic value is greater than fiat money's intrinsic value!

Check out our latest PsychoNews story, "The Calm Before the Storm":

"Nigeria issued an arrest warrant for Dick Cheney, but ended up withdrawing it.  Oh, I'm sorry, let me rephrase.  They ended up withdrawing it AFTER Halliburton agreed to pay $250 million "in lieu of prosecution".  So basically Nigeria's Anti-Corruption Office just ran an extortion scheme on Dick Cheney and Halliburton, who have claimed they did nothing wrong.  Really?  So you did nothing wrong,  and decided not to contest the fine, and instead decided to pay $250 million out of the kindness of your heart? Or was it to make the problem go away? 

There are quite clearly two sets of rules on this planet, although it would be wise not to wager money on the two sets of rules remaining distinct in perpetuity.  In other words, never underestimate people's desire for justice, and don't be surprised to see the current state of affairs come abruptly to an end."

Malcolm Tucker's picture

Watch Nigel Farage wish the EU a happy holiday lol. He says the euro crisis " is like watching a slow motion car crash"

Long gold/euro...

doolittlegeorge's picture

and of course "here come's the cable TV special about a new gold rush."  i'm going long the advertisers.

cbaba's picture

Well it depends what you call rusty,or what is more rusty.

US government is begging to that Rusty Italian to buy the Chrysler and invest in US.


the mad hatter's picture

FIAT does stand for Fix It Again Tony!

indio007's picture

 No one has to accept FRN's as a payment for debt. Unfortunately most people form their contracts to do so without realizing it.

Money is whatever the parties agree to.


DosZap's picture

Correct, to a point.

If its between private individuals who decide to barter, your correct.

If its a mainstream store, business, etc, they MUST accept the FRN's.

As long as they are LEGAL TENDER, its against the law to not accept them for payment of goods and services.

nathan1234's picture

Gold has no financial value !!!!

And paper money has financial value!!!

The author is talking through his bottom hole.



traderjoe's picture

Well put.

I have read the interesting comment that at least gold and silver represent the production value to get them out of the ground and minted. And of course, as you reference, gold can be possessed, has no counter-parties, and no debt associated with it. 

UninterestedObserver's picture

Well printing presses, ink and paper aren't free either LOL

DosZap's picture

Anything that requires a unit of work, has intrinsic value.

What that is, is dependent on the agreement between the parties involved,and what the unit of work is worth.

Just about anything has intrinsic value, based on supply and demand, and thats abot the jist of it.

Aristarchan's picture

Something has a basis of intrinsic value only if there exists a perception that an underlying true value exists. True values only exist in the heart and buying power of man. And this can change in a heartbeat. Gold has intrinsic value because people are buying it, and people perceive it to be worth less than it will be in the future. People, as a group, in some given timeline, are always wrong. Gold will always be there, but it will not, in every age, be a speculative-driven commodity.

Francis Dollarhyde's picture

Digging a ditch and filling it again requires a unit of work. That ditch can be arbitrarily deep. By that measure, each square foot of undisturbed sod has nearly infinite value, since it is indistinguishable from an arbitrarily deep ditch that has been dug and refilled.

The value of a thing is what it will bring. Period.

Like anything else, gold only has value as long as you can find a greater fool to sell it to. Fortunately, gold has a 6,000 year history of making people foolish, so that's a fairly safe bet. There may be periods where fools foresake it for MBS or whatnot, but they always come back.

Al Gorerhythm's picture

A unit of work doesn't necessarily produce an item of wealth. Wealth is connected work that provides assets that can be converted into providing the basic human needs.

Exter's pyramid provides an evaluation of assets according to counter party risk. As gold is the ultimate store of value, according to historic use, all derivatives attached to risk can be priced in gold. As long as gold holds its properties as a risk free asset, risk averse investors will turn to it. It is not a measurement of value, it is a measurement of risk that I study. When money is being manipulated beyond the possibility of fair return, investors will revert to an alternative to risk assets or a gold standard of their own. Everything is provided a value priced in the currency of use, according to risk of default. Your hole in the ground provides nothing other than wasted effort.

DosZap's picture

Well, if you want to go around the tree, and use  semantics, ok.

Your labor is (no matter the end result), is /has a negotiated value.

You can set it, agree to its worth, or do it for free.

The only thing the common man / woman has is the ability to perform a service, labor for something of value.(whatever that may be).

In which their efforts(units/of value),are the means by which they survive, or get ahead, eat, roof,cars, fuel etc.

Al Gorerhythm's picture

What is semantic about my comments DZ?

I am simply saying, as are you, that labour has to be tied to productive service to be worthy of exchange. In answer to his post about digging holes, I was simply saying that I'm not going to hire someone to dig a series of arbitrarily placed holes on my property, if they serve no function. If we were to exchange time and labor on each other's property, I'm not going to exchange my day on his property in exchange for a mob of useless holes.  

Further to the argument, as I recently read somewhere, all labor is distilled into money (or words to that effect). Essentially the point was, wealth is brought into existence through productive labour. Labor distilled into gold makes labor divisible, enabling workers to balance inequitable exchanges of services or goods.

Money was invented as a representative credit of wealth through labor. It was found to be a useful means to transport title to wealth ownership between distant parties. The medium used as money had to be trustworthy for both parties. Paper can do the same thing but because of concerns over risk to honest exchange, its intrinsic defects as a derivative of labor, doesn't carry the safety of other rarer and desirable mediums.  The medium most universally used to establish trust in credit was gold. Universal recognition of its properties made it useful in establishing settlement. There is no dispute when gold is used as it can be on-traded.

What ever the medium employed as money, it must hold its value over time or lose its mantle as money. Low flow to production ratios, indestructibility, fungibility, divisibIlity are those properties. Gold fulfills all of these demands.

How? Simplistically, the effort of digging a post hole today will not change in output required in 10 or 100 years time. Gold's properties do not change  over time either making it a perfect yardstick for labor. If I save the payment for those holes dug today, I should be able to pull the savings out of storage when I'm old and feeble and contract someone younger to do it for the same price. If money can't be stored over time without losing value, it isn't money, having lost its storage property. 

Any excess wages that I earn, are stored as wealth protection assets. I am not a sophisticated investor and therefore rely on the veracity of the medium that is used as money to fulfill the functions of money in storing my labor. As the current fiat system provides little safety for my savings, it can't be relied on as money. Money saved is a call on honesty. Savings of paper always end up "Out of the money".  

The derivatives of gold (all other risk assets) are overvalued and the risk of further devaluations in other assets weighs heavily on my decision to be all in in PMs. As I said, I'm unsophisticated and avoid leverage as another way of eliminating risk. I suppose that a lot of people seem to read the same signals and hence the price of PMs. 

Remember, gold values all currencies, hence the purchasing power of dollars in all other assets.


Worker Bee's picture

Nothing outside of food,water,shelter and air...oh and possibly sex.. has any intrinsic value unless you assign a value, and the only reason things get assigned value is because they help you obtain those things I mentioned.

Temporalist's picture

You left off drugs/alcohol/tobacco/medicine/caffeine, energy, tools, metal, wood, plastic, heat, wax, glue, duct tape, fire arms/defense/swords/knives, books/literature, seeds, knowledge...

blindfaith's picture

gold has the same sort of intrinsic values as religions. 

Faith and trust is it's basis, it is enduring and can't be created or substituted by man.  It is tradeable yes but it is not absolutely necessary to trade it to have value. 

You can believe it it or not, it can give you comfort or pain.  Men kill for both.  Men can be controlled by both.  Men can turn their backs to both.

UninterestedObserver's picture

? you can die for your beliefs but I think you will have a real hard time selling them for $1400/oz....

Urban Roman's picture

That does it, I'm going to do it this time.

Monday morning, my 401K goes into stone wheels from the South Pacific.

Argos's picture

Yap, yap, yap.  I'm long yap too.  They make a good fence.

Billy Shears's picture

What, no "Gold Bitchez"? C'mon, let me have a "Gold Bitchez", please!

cheongwee's picture

So what so good about your gold if someday you found out that authority have outlaw it.

How much will your gold worth?

It is not the gold standard or whatever it is that dictate value or protect your year of labour, it is the honesty and uprighteousness of the authority that can protect your saving.

If people are not honest and want to manipulate a system, there is nothing we can do. They can always break the rules and go around.

So it actually come down to honesty and uprighteousness that is the matter. Not what so call gold standard. If poeple want to cheat and manipulate, there is nothing we can do.

Especially when that group of people hold high office.

But we can still ride on the trend, and take advantage of people fear and greed on this gold bull.

Make hay while the sun shines. And right now make money while gold shines(glitter).

Dont let the opportunity fly by.

Good luck.


merehuman's picture

lots of things are outlawed, pot and other drugs still get to the customer. Go figure

Oracle of Kypseli's picture

At a higher price.

The same will happen with Precious metals. Become a part time jewellerer and get an exemption.

nathan1234's picture

During Wars cigarettes, food cans, chocolates etc command a premium too.

And normally there is a barter or payment in gold and or silver

Calmyourself's picture

I guess I did not think of that.. They could outlaw food next or perhaps the ingestion of oxygen.  Better yet they should outlaw alcohol.  Every Government has limits to its power and as legitimacy fades in the minds of people like us that power fades.  The sheeple are a side show, having both more and less power than we think.  The authoritahs have not done much to insure the value of my money or stored labor these past years. 

The argument stems from faith and is built upon sand and then degenerates into even less substance, collector plates vs Gold, ha.. 

UninterestedObserver's picture

They were working on that with the Carbon Credits scam

blindfaith's picture

Friday on Marketplace, the editor of the Wall Street Journal said in an interview (and this is a quote) " Gold is what caused the great Depression of 1929".

Sure makes me want to subscribe to another Rupert Murdock propaganda rag.  How is it this Australian, this foreigner,  can rework America thinking into his so easy?


robobbob's picture

I have not seen the WSJ article, but according to "Conjuring Hitler",  after years of wild speculation and loose money in the USA, the BOE raised their rates leading to capital moving from the US to the UK, blowing out the buying on margin mania on Wall Steet.  According to Giacomo, the reason behind their rate change was an attempt by the BOE to attract foreign investment to use to increase their gold holdings in preparation in returning to a gold standard. The resulting US crash may or may not been intentional.

The name calling of your comment does nothing to persuade anyone of your view. I have far more problems with a certain Hungarian who is actively trying to rework American thinking. If you have issues with a tabloid owner pandering to an audience, where do you stand on a guy who pours hundreds of millions into directly undermining the country?

TheGreatPonzi's picture

This PDF doesn't answer to any interesting question about gold.

The lenghty dissertation on gold's price is useless, as the price of gold doesn't matter. People don't buy gold as an "investment", but as a hedge against inflation and government defaults. Thus, if gold goes to $5,000 an ounce, $50,000 or $5,000,000,000,000,000,000, it doesn't really have a meaning.

In the last years of German hyperinflation, gold traded at a few centillion marks. Those who sold at a trillion marks lost money.

Funny enough, you always hear Bloomberg and CNBC call gold a bubble at $1,500, but they absolutely never branded a fiat currency "bubble".

Bay of Pigs's picture

Yes, I think you have it right, the USD is the bubble, not gold.

DoctoRx's picture

Cash in the US and UK is the bubble.  Two year notes up from 32 bps to a whopping 61 bps are bubbly.  It would have been appropriate for Mr Marks to have pointed that there is where the gross overvaluation lies.

As far as his mention of a foreigner maybe talking his book, there are innumerable ZH'ers who agree w him and who are not talking their book.  Just plain old fed up (Fed up?) people.

DoctoRx's picture

Cash in the US and UK is the bubble.  Two year notes up from 32 bps to a whopping 61 bps are bubbly.  It would have been appropriate for Mr Marks to have pointed that there is where the gross overvaluation lies.

As far as his mention of a foreigner maybe talking his book, there are innumerable ZH'ers who agree w him and who are not talking their book.  Just plain old fed up (Fed up?) people.

macholatte's picture

In the last years of German hyperinflation, gold traded at a few centillion marks. Those who sold at a trillion marks lost money.


yes. good point. apparently the thing to do for the wise German at that time would have been to trade his gold for another country's fiat so he could have had some cash to buy food and not lose value .... value in German currency, that is.  In fact, that is what many did. Considering the proximity of Germany to so many other countries it was easy..... if you had the gold, or diamonds or silver or copper or.......... anything but German fiat.


doolittlegeorge's picture

or "vote Hitler since the game is rigged."  yes, yes?

Jay's picture

"In the last years of German hyperinflation, gold traded at a few centillion marks. Those who sold at a trillion marks lost money."

But what if the currency doesn't go into hyperinflation? If the object is to get as much bullion for your dollars as possible when do you buy? Those who paid >$800/oz in 1980, when price inflation was raging in the double digits, watched the value of gold in relation to dollars decline for 20 years!

redpill's picture

The difference between then and now is that the US debt load can no longer withstand 18% interest rates, so our central banksters will simply not do it.

UninterestedObserver's picture

Exactly the next time I hear that retarded argument all we need to do is gently remind everyone what the interest payment 18% is on 14 Trillion and what the effects would be.

A Nanny Moose's picture

I think a more appriopriate comparison would be PoG in other goods. Does an once of gold still buy the same amount of some basket of goods (i.e. a hand made suit = 1oz AU)? If purchasing power doubles or triples in terms of those other goods, perhaps then we can call it a bubble?

TheGreatPonzi's picture

Relative prices can also decrease. An ounce of gold can buy more goods than before (always relatively speaking) if these goods are better produced (usually thanks to technology).

Before the FED, prices were stable or decreasing.

Goldenballs's picture

So if Gold has no value then everything in the history of humanity has had no value whatsoever.Therefore the great pyramid scheme goes back beyond ancient Egypt.Mankind has been duped forever !!!!!!!!!!!!!!!!!