A Parable On Gold From Jim Grant

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Mon, 10/05/2009 - 01:03 | 88583 Stink_Pickle
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This is a very good argument for a very good point:  gold is a fantastic store of value for the risk averse. 

Another point I would reinforce here is that with Terry Herbert's booty (e.g. the awesome hilts of the conquered and other items), the historical value of an item acts much more like a commodity than a store of value.  Certainly a Honus Wagner baseball card will be considered priceless to an American, but could be considered worthless to the future ruling Chinese (arguably current as US debt holders).

Mon, 10/05/2009 - 17:18 | 89216 Anonymous
Anonymous's picture

People who bought gold at 850 in 1980 might not agree
gold is a fantastic store of value for the risk averse.

19 years later is traded at $255.

People buying gold above $1000 might find similar...

Mon, 10/05/2009 - 01:23 | 88594 Anonymous
Anonymous's picture

The only issue with this argument is that inflation needs to be taken into account, which most likely averaged more than 2 percent per year historically. Deflating that number by the CPI would probably yield a negative real interest rate (I say may, because that is my best guess). This article degrades this website with such poor analysis.

Mon, 10/05/2009 - 10:21 | 88793 Anonymous
Anonymous's picture

No, inflation does not need to be taken into account. That is the whole point. This example proves more than anything how difficult it is to earn 2%/yr over an extended period of time.

Mon, 10/05/2009 - 10:22 | 88796 Anonymous
Anonymous's picture

No, inflation does not need to be taken into account. That is the whole point. This example proves more than anything how difficult it is to earn 2%/yr over an extended period of time.

Mon, 10/05/2009 - 10:35 | 88821 Anonymous
Anonymous's picture

Agreed. Moreover, it doesn't look like Grant was accounting for taxes (for whatever times income-type tax schemes were in effect) on that 2 or 3% annual interest. Combining taxes with the effects of inflation, that initial $2.0347 worth of gold presumably would have served a hypothetical extremely-long lived gold hoarder far better than if he had continuously reinvested the initial $2 stake in the suggested fixed-income investment scenario.

Wed, 11/25/2009 - 08:35 | 141752 Anonymous
Anonymous's picture

If you visit westegg.com, you'll see that between 1800 and 1900, prices fell by approximately 50%. Others have noted that the cost of a 2 penny stamp in Britain when Victoria was Queen was still 2 pennies one hundred years later. If you assume 2% inflation per year, after 100 years, prices should be almost 8 times what they were.

And, like the CRU people, I'm going to assume you've "lost" your supporting data.

Mon, 10/05/2009 - 02:09 | 88605 agrotera
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I love his poetry--whenever anyone wants to talk about long term investing, i always say, we don't live in 10, 20 or 30 year cycles,  and Grant really says it well:

The truth about the long term, then, is that it consists of a sequence of short terms and these short terms are full of episodes we call history: war, peace, pestilence, progress, revolution, invention, discovery, depression, enterprise, bankruptcy, birth, death, taxes and such.

Mon, 10/05/2009 - 02:16 | 88606 Gunther
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The gold found in the ground did not change- nothing new about that.
Is that piece in reality an illustration of the absurdity of compounding interest over long times?

Mon, 10/05/2009 - 03:38 | 88626 Anonymous
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Excellent point. I've long argued that the concept of compound interest was contrived by lenders who are simply perpetrating another scam on the borrower. Mathematically, the idea of compound interest fails both historically and when projected into the future, but is sure does make the lender wealthy.

Mon, 10/05/2009 - 06:46 | 88642 Hephasteus
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it's just as absurd over short periods. I've never seen a fractional reserve currecy economy continue for long. Rome did a good job for the longest time until the fractional reserving hit and people started loaning tons out at interest and then they just mass migrated away with all of romes gold leaving behind a huge empire with 1/10th the gold and 10x the value psychology. Coins were being cut down more and more till they looked like little tiny fractions of themselves.

Mon, 10/05/2009 - 03:14 | 88622 Anonymous
Anonymous's picture

It's a very good essay and it puts the idea of gold as an investment into perspective.

I find it interesting to consider what the buried gold would have been worth if no other gold had been discovered and dug up in all history after that point in time. In that unlikely scenario and given progress and population expansion as it has occurred the buried gold would be worth a lot more.

So more gold has been discovered as more people have become interested in finding it and more people and resources have come available to extract it. The nett effect being that gold is now worth roughly the same as it always has been. This is not a characteristic of fiat money.

Gold as effective universal and transportable money that retains its value has the interesting property that at certain "special" times when all else is failing a relatively small amount may be traded for a items, property, or services of disproportionatly large value compared to it "normal" valuation.

Mon, 10/05/2009 - 03:40 | 88627 Anonymous
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I think what is interesting about this is to illustrate the fascination that gold has over the minds of otherwise rational people. the fetishism of gold as a 'true' as opposed to a 'fiat' currency is a little like the argument of biological behaviourislists that we can explain social interaction by reference to our hunter gatherer forebears.

The basis of modern economics is that we seperate exhange goods, services and even currencies and that we agree some form of exchange mechanism, generally currnecy or assets that are believed to ahve a avlaue in currency. There is no reason for gold to have a value any more than dollars. Any serious reading of the Aztec empire showed that thier view of gold (which was abundant) was that it was decorative but not valuable. Referred to as the excremnent of the gods and considered far less valuable than colourful feathers.

Value depends on a society's current view of value. Jastram's "good man's suit of clothes" is hardly a universal truth.

Mon, 10/05/2009 - 09:51 | 88751 Anonymous
Anonymous's picture

"There is no reason for gold to have a value any more than dollars."

Except that alchemists succeed in conjuring dollars from dust. Even authentic decorative feathers have some scarcity.

Mon, 10/05/2009 - 04:27 | 88632 jdun
jdun's picture

He took the risks out of the equation.

The problem with this theory is countries, currencies, and government doesn't last as long as gold. Not even close.

 

 

 

 

Mon, 10/05/2009 - 09:47 | 88747 gmrpeabody
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+10

Mon, 10/05/2009 - 10:32 | 88813 Anonymous
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+ 1, what good would $250 Billion marks do you in 1935? A loaf of bread maybe...

Mon, 10/05/2009 - 06:44 | 88641 aus_punter
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in the short term $USD's produce no income either

Mon, 10/05/2009 - 11:19 | 88881 Anonymous
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Especially at almost 0% interest...

Mon, 10/05/2009 - 12:51 | 88937 perpetual-runner-up
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its proven the have a negative interest rate in terms of purchasing power...

in order to maintain purchasing power, you need to make enough money to combat deflating dollar and taxes on your "earnings/maintainings"

Mon, 10/05/2009 - 07:07 | 88645 Manfred
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And in a giant leap forward for financial television, Fox Business has replaced Alexis Glick with Don Imus in the 6-9am slot. It streams live at foxbusiness.com(though they seem to be down right now) also streams at http://www.thestreet.ca/m_2.asp which appears to be working.

My initial reaction is that it is worse than bad but compared to CNBC - I think Bloomberg will be the big winner.  

 

 

Mon, 10/05/2009 - 07:10 | 88647 Careless Whisper
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Let's say you could time travel to the year 2609. What would you take with you, one ounce of gold or ten Benjamins?

Mon, 10/05/2009 - 08:54 | 88687 pivot
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i have a hypothetical too, which is much more realistic than yours.  Lets say you have to buy groceries tomorrow, which would you rather have?  i dont know anyone who is faced with your scenario but know many faced with mine.

Mon, 10/05/2009 - 09:56 | 88756 Anonymous
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And my hypothetical is just as valid as yours. Say your government is hopelessly indebted, and is forced to devalue your currency. You need to buy groceries tomorrow. Will you also need to buy groceries after that?

Mon, 10/05/2009 - 10:24 | 88761 lookma
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double

Mon, 10/05/2009 - 10:01 | 88762 lookma
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What does buying groceries tomorrow have to do with a saving? They both involve finding a store of value.

Mon, 10/05/2009 - 12:53 | 88939 perpetual-runner-up
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lets say you lived in a superpwer and needed to retire in 10 years...say we are talking 1988-1998 timeline....

 

would you rather have 100 million rubles or 1million in gold?

 

which would have served you better? because there were millions faced with that scenario

 

 

Mon, 10/05/2009 - 14:40 | 89056 Rusty_Shackleford
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If you were trying to buy groceries in Zimbabwe right now, $1,000,000,000,000 of paper broken promises would only get you an empty belly.  

 

However, 0.1 grams of gold would get you a loaf of bread.

 

Most of us try and plan for the preservation of our purchasing power on a time horizon greater than 24 hours. 

Mon, 10/05/2009 - 10:32 | 88811 Anonymous
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600 years is a long time. Very few countries have had gpvernments which lasted that long. Even Rome had some regime changes. Can you change the question to: one ounce of gold vs my choice of bonds? That is, I get to adjust my bond choices. Or how about a 30 year time frame?

Mon, 10/05/2009 - 07:20 | 88648 RagnarDanneskjold
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If only I lived for a millennium. This is like all those 2% inflation charts that go vertical after 100 years. During most peoples' lifetime, they only experience the middle portion of the chart, slow steady inflation. 

The lesson here is that crisis comes no matter what, the question is whether you're living at a time of crisis or not. Today, that probability is high.

Mon, 10/05/2009 - 09:46 | 88746 SWRichmond
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During most peoples' lifetime, they only experience the middle portion of the chart, slow steady inflation.

That's because currencies keep being reset, isn't it?  The U.S.'s currency has been reset twice in the last 100 years, once in 1933, and once in 1971.  So much for perpetual returns.  Grant's analysis falls flat on this basis alone.

Mon, 10/05/2009 - 10:02 | 88764 lookma
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You've identified Grant's point.

Mon, 10/05/2009 - 10:39 | 88829 RagnarDanneskjold
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Yes, but it's the resets, not the inflation. Assuming a 2% constant inflation, a person born 200 years from now would see the same inflation rate over their lifetime as someone born in 2000, yet the dollar may be worth a thousandth or less of a dollar today, just as a dollar from 1913 is worth a few cents today, but how many people alive in 1913 are still carrying around those paper dollars?

I'm not arguing against gold, its good to own now, but that's because I think we're approaching a reset. Once it happens (it could take years to complete), I may not need to own gold again in my lifetime.

 

Mon, 10/05/2009 - 10:55 | 88857 Anonymous
Anonymous's picture

Ragnar, I love you and your pirate looting ways. If the Somalis had your motives at heart we might be able to shape a better world.

Ultimately, money serves as a claim on real assets. When the great game of musical chairs stops, make sure you're holding something tangible or something that can be exchanged for something tangible.

Mon, 10/05/2009 - 07:26 | 88650 Anonymous
Anonymous's picture

@ Careless Whisper

I feel silly saying this, but that pretty much is the best arguement I've heard yet. Lol

Mon, 10/05/2009 - 08:57 | 88690 pivot
pivot's picture

that is because you either 1) are planning on living 600 years or 2) have a time machine.

Mon, 10/05/2009 - 07:49 | 88654 lookma
lookma's picture

Thank you

Kingdoms rise and fall, debts are incurred and repaid, or - as often as not - not repaid, or repaid in money unrecognizable to the poor creditor. Interest runs for years at a time, but rarely even for decades, politics or central banks intervening to disrupt the piling up of what would otherwise be wealth too vast to be stored on the planet Earth.

Mon, 10/05/2009 - 08:13 | 88664 Achilles
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Gold has no purpose. You can't eat gold. Gold is only valuable, because people believe that other people will accept it as a means of payment. Sounds familiar? If you prepare for the end of fiat money, buy fertile land, oil or a useful commodity.

Mon, 10/05/2009 - 08:37 | 88676 Anonymous
Anonymous's picture

if it has no purpose why don't all central banks just sell it to highest bidder? Outright sell it...

Mon, 10/05/2009 - 09:40 | 88738 Achilles
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Maybe they already did :)  Did you recently visit Fort Knox?

Mon, 10/05/2009 - 08:45 | 88681 Anonymous
Anonymous's picture

I do not think I will accept someone's fertile land as payment, since I will stay where I am now. I do not think I will accept someone's oil as payment, since I have no tank to store that oil in. I do not think I will accept someone's useful commodity as payment, since I don't know whether that commodity is toilet paper or pig iron. Therefore, I think I will accept as payment that which people everyone, throughout history, has accepted: gold and silver.

Mon, 10/05/2009 - 09:35 | 88733 Achilles
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You will accept my loaf of bread for a kilo of gold, when you are starving.

Mon, 10/05/2009 - 10:03 | 88767 Anonymous
Anonymous's picture

Are you are bread factory? How much bread can you store without spoilage? What do you hope to accept as "payment"? Do you even think beyond square one?

Mon, 10/05/2009 - 11:13 | 88845 Achilles
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If fiat money fails, there will be no one buying your gold. It will be one great default and prices of everything will fall.  People will be poor. Furthermore, there will not be enough gold around to serve as an efficient way of payment, so they will use something else. 

 

Mon, 10/05/2009 - 12:39 | 88928 Daedal
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LOL! The only thing that's gold is your commentary. Pure gold. Thanks for the laugh.

Tue, 10/06/2009 - 06:55 | 89794 Hephasteus
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Dessert. 24k gold flake as an ingredient. You can eat gold. So there.

http://veryveryfun.com/pics/World%27s-most-expensive-dessert/World%27s-m...

Mon, 10/05/2009 - 16:14 | 89145 DiverCity
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Pwned, he was.

Mon, 10/05/2009 - 10:38 | 88823 Anonymous
Anonymous's picture

My grandparents lived through the Great Depression, and they never starved, and they held onto some of their silver dollars. They always grew sweet potatoes and tomatoes and such and always had fruit trees in their yard, and they always fished. I can't recall their ever telling any story about anyone trading a kilo of gold for a loaf of bread.

Mon, 10/05/2009 - 10:55 | 88855 Achilles
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Yes, but he thought of food first. Of course, its good to spread your investments and keep some gold or silver.

Mon, 10/05/2009 - 11:33 | 88891 Anonymous
Anonymous's picture

Okay. Truce. Also, Brad Pitt was great as Achilles, but my favorite was the movie "Snatch".

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