At the risk of sounding like a broken record we'd like to say a bit more about economists' tendency to get their monetary history wrong; in particular, the common myths about the gold standard. If there's one monetary history topic that tends to get handled especially sloppily by monetary economists, not to mention other sorts, this is it. Sure, the gold standard was hardly perfect, and gold bugs themselves sometimes make silly claims about their favorite former monetary standard. But these things don't excuse the errors many economists commit in their eagerness to find fault with that "barbarous relic." The point, in other words, isn't to make a pitch for gold. It's to make a pitch for something - anything - that's better than our present, lousy money.
It began in Dec 2008. To understand it, it is necessary to understand two principles. The first is that gold is money and the dollar is credit (which is currently worth 28.4mg gold). For the second, we emphasize it's not just price, but separate bid and ask prices.
For the last three weeks, gold has experienced something that has never happened before - hedge funds aggregate net position has been short for the first time in history. However, as Dana Lyons notes, this week saw another 'historic' shift in gold positioning as commercial hedgers shifted to the least hedged since 2001... so the 'fast' money is chasing momentum and the 'smart' money is lifting hedges into them.
Religious imagery... peak condescension... everyone proclaiming "gold is dead"... In a nutshell, sentiment has plunged to negative levels not seen in years, if not more than a decade. Here are four mainstream media articles that provide some evidence we may be approaching a sentiment low. Some of them we're sure you’ve seen, others perhaps not. What amazes us is how they’ve all come out within the last two weeks.
Since yesterday there has been another of wave of negative, misleading and almost triumphalist commentary on gold most of which studiously ignores the clear evidence of manipulation of the price on Sunday night.
The WSJ has released yet another gold hit piece calling it a "pet rock' and gold bugs "subjects of a laboratory experiment on the psychology of cognitive dissonance" just one day after the PBOC reveals it has added the biggest amount of gold in history in order to "ensure security." But the biggest irony is that none other than Citigroup made a far bolder case that it is not the ownership of gold but of stocks that is the ultimate act of faith: "investors remain united in their faith in the central banks – if not for their ability to create growth, then at least in their ability to push up asset prices. And yet the limits of that faith are increasingly on display." So who is right?
In a January 2013 report “Report of the Working Group to Study the Issues Related to Gold Imports and Gold Loans by NBFCs”, the Reserve Bank of India estimated that the ratio of paper gold trading to physical gold trading is 92:1. That is a lot of unbacked paper gold instruments. This has almost entirely separated the “gold price”, such as it is (the clearing price for vast volumes of paper gold “representations” with a fractional backing) from the fundamental supply and demand dynamics for actual physical gold bullion.
As Mr L. famously quipped. "Ever get the feeling you’ve been cheated?"
Tick, tock... "it could never happen here?"
Gold bugs weren’t wrong - just super early. If central banks ever got religion and pulled a Volcker and hiked rates to the moon, it would be a remarkably bad time to hold gold. However, throughout history, there have been times where people were very sad that they didn’t own gold. We talk about one of them here. It’s very real, and the history of fiat currencies is also quite sad.
In the ironically titled "Paying For The Past" presentation, none other than Dick Fisher, Al Greenspan, and Larry Lindsey appear to have crossed the Rubicon of denial, lies, and deception to the dark-side of accepting reality. As Bill Holter asks, why exactly would these former Federal Reservists hint that, mathematically, logically, intuitively and in real life, IT'S OVER! Do they now realize what the crazy gold bugs have been saying all along is true and the day of reckoning is very close at hand. They must be trying to get "out in front" of what is coming so they're on the record for historical and "legacy" purposes. Nothing else makes any sense.
The Economist is a quintessential establishment publication. Keynesian shibboleths about “market failure” and the need to prevent it, as well as the alleged need for governments to provide “public goods” and to steer the economy in directions desired by the ruling elite with a variety of taxation and spending schemes as well as monetary interventionism, are dripping from its pages in generous dollops. The magazine has one of the very best records as a contrary indicator whenever it comments on markets. While gold hasn’t yet made it to the front page, but the Economist has sacrificed some ink in order to declare it “dead” (or rather, “buried”).
In a remarkably unbalanced and lazy article on gold this month the Economist magazine attempts to dismantle the case for investors and others to own gold. Both from an investment point of view and also from an ethical point of view. The article is so laughably one sided that it resembles propaganda rather than journalism. Therefore, we take pleasure in dissecting the article misleading sentence by misleading sentence.
I would like to make my own modest effort to put to rest a trite little phrase that gets trotted out every time silver and gold are getting trashed.
- Silly gold ‘bug’ name calling shows bias against gold and towards stocks - “Gold bugs” and “stock roaches” can peacefully coexist - Maybe a rational debate would be enlightening ...
Are gold prices going to US$ 5,000 or US$500 an ounce?