Guest Post: Gold's Value Today

Tyler Durden's picture

Via John Aziz of Azizonomics,


Way back in 2009, I remember fielding all manner of questions from people wanting to invest in gold, having seen it spike from its turn-of-the-millennium slump, and worried about the state of the wider financial economy.

A whole swathe of those were from people wanting to invest in exchange traded funds (ETFs). I always and without exception slammed the notion of a gold ETF as being outstandingly awful, and solely for investors who didn’t really understand the modern case for gold — those who believed that gold was a “commodity” with the potential to “do well” in the coming years. People who wanted to push dollars in, and get more dollars out some years later.

2009 was the year when gold ETFs really broke into the mass consciousness:

Yet by 2011 the market had collapsed: people were buying much, much larger quantities of physical bullion and coins, but the popularity of ETFs had greatly slumped.

This is even clearer when the ETF market is expressed as a percentage of the physical market. While in 2009 ETFs looked poised to overtake the market in physical bullion and coins, by 2011 they constituted merely a tenth of the physical market:

So what does this say about gold?

I think it is shouting and screaming one thing: the people are slowly and subtly waking up to gold’s true role.

Gold is not just a store of value; it is not just a unit of account; and it is not just a medium of exchange. It is all of those things, but so are dollars, yen and renminbei.

Physical precious metals (but especially gold) are the only liquid assets with negligible counter-party risk.

What is counter-party risk?

As I wrote in December:

Counter-party risk is the external risk investments face. The counter-party risk to fiat currency is that the counter-party — in this case the government — will fail to deliver a system where that fiat money will be acceptable as payment for goods and services. The counter-party risk to a bond or a derivative or a swap is that the counter-party  will default on their obligations.


Gold — at least the physical form — has negligible counter-party risk. It’s been recognised as valuable for thousands of years.


Counter-party risk is a symptom of dependency. And the global financial system is a paradigm of interdependency: inter-connected leverage, soaring gross derivatives exposure, abstract securitisations.


When everyone in the system owes shedloads of money to everyone else the failure of one can often snowball into the failure of the many.

Or as Zhang Jianhua of the People’s Bank of China put it:

No asset is safe now. The only choice to hedge risks is to hold hard currency — gold.

So the key difference between physical metal and an ETF product is that an ETF product has counter-party risk. Its custodian could pull a Corzine and run off with your assets. They could be swallowed up by another shadow banking or derivatives collapse. And some ETFs are not even holding any gold at all; they may just be taking your money and buying futures. Unless you read all of the small-print, and then have the ability to comprehensively audit the custodian, you just don’t know.

With gold in your vault or your basement you know what you’re getting. There are other risks, of course — the largest being robbery, alongside the small danger of being sold fake (tungsten-lined) bullion. But the hyper-fragility of the modern banking system, the debt overhang, and the speculative and arbitrage bubbles don’t threaten to wipe you out.

Paper was only ever as good as the person making the promise. But increasingly in this hyper-connected world, paper is only ever as good as the people who owe money to the person making the promise. As we saw in 2008, the innovations of shadow banking and the derivatives system intermesh the balance sheets of companies to a never-before-seen extent. This often means that one failure (like that of Lehman brothers) can trigger a cascade that threatens the entire system. If you’re lucky you’ll get a government bailout, or a payout from a bankruptcy court, but there’s no guarantee of that.

Physical gold sits undaunted, solid as a rock, retaining its purchasing power, immune to counter-party risk.

I think more and more investors — as well as central banks, particularly the People’s Bank of China — are comprehending that reality and demanding the real deal.

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fnord88's picture

Maybe. I have high hopes for my gold. But when everyone finally realises what a scam Keynesian econ really is, i think the signed first edition first print copies of Hayek and Rothbard I have will be worth a lot more than my gold.

PaperWillBurn's picture

I carry a 1oz AGE in my wallet.

anonum's picture

Today's silver is tomorrow's gold.

theTribster's picture

Yes, like it...that is very accurate statement.

Ag Tex's picture

Soon you will need gold in order to afford silver.

toady's picture

Gold is great for rich people, but I can't afford more than an ounce or two a month. I have a lot of silver, but gold is just too much.

fonzannoon's picture

An ounce or two a month? Over a decent time period that seems pretty damn good to me.

Deo vindice's picture

He's setting you up. Some people like to boast by appearing they aren't.

Aziz's picture

Putting away an ounce or two a YEAR will give you the purchasing power to feed your family for a few months. Could be invaluable.

toady's picture

That's why I do it!

I'm a little worried about the other side with gold too... who is going to buy it when its SUPER expensive and I need to sell? I guess I just need to never 'need' to sell...

That's why I still buy more silver than gold. The numbers are much more manageable.

Keep stacking compadres!

jimmyjames's picture

who is going to buy it when its SUPER expensive and I need to sell?


You will likely be selling it at high prices to the same people who sold it to you cheap-

Central banks and Governments that will be desperate for gold to back their crashing currencies-

Diogenes's picture

The price of gold does not change. The price of paper changes.


In 1870 gold was $20 an ounce and $20 would buy you a good suit of clothes. 20 ounces ($400) would buy you a horse and buggy and 200 ounces ( $4000) would buy a farm.

In 1940 gold was $35 an ounce and $35 would buy you a good suit of clothes. 20 ounces ($700) would buy a new Chevrolet and 200 ounces ($7000) would buy a farm.

In 2012 gold is $1600 an ounce and $1600 will buy you a good suit of clothes. 20 ounces ($32000) will buy you a new Chevrolet and 200 ounces ($320,000) will buy a farm.

100 years from now who knows how many "dollars" an ounce of gold will be "worth" or if we will even be using dollars. But I bet an ounce of gold will still buy a good suit of clothes, 20 ounces will buy a new car, or possibly a jet propelled space ship, and 200 ounces will buy a farm.

smiler03's picture

Interesting. Could you post again using the years 1980 and 2008, that would be even more interesting.


akak's picture

I see you are still disingenuously trying to beat that 1980 gold price spike dead horse.

Isn't it rather pulpy by now?

Yes, it is true that, contrary to the poster's claim above, the value of gold DOES change over time --- but that is largely a reflection of the changing perceptions of the value of our government-controlled fiat currencies, and the ever-changing levels of trust in our corrupt and failing financial and monetary systems, rather than anything inherent in gold itself.  Was not a seat in a lifeboat on the Titanic worth vastly more after the ship hit the iceberg, rather than before?

Nevertheless, it is specious and outright dishonest to try to denigrate the worth of holding gold based on a one-time and BRIEF price spike over 30 years ago.  The simple fact is, vanishingly few ever bought gold at or anywhere near that transient price spike, so your argument is nothing but cherry-picking taken to the ultimate, and disingenuous, extreme.  For that I spit on you.

Diogenes's picture

I just told you the price of gold does not change. The price of dollars changes. There are times when the gold/dollar relationship gets out of whack. Just like there are times when stocks are overpriced/underpriced in relation to value. But there is an equilibrium point and over time the market has a strong tendency to correct.

To put it another way, 1980 and 2008 tell you more about the value of paper and the state of the economy than the value of gold. Get used to looking at value in terms of gold, not paper, and a lot of things become clear.

This also means if you are looking forward to the day when gold is worth $1,000,000 an ounce so you can buy a mansion for one ounce of gold you are bound to be disappointed.

Gold may well be worth $1,000,000 an ounce some day. But when that day comes, a good suit will cost $1,000,000, a new car $20,000,000 and a farm $200,000,000. And someone who put away an ounce of gold in 2012 will be better off than someone who put away $1600 in cash.

The.Oracle's picture

Yup exactly. Check out Mike Maloney or youtube channel: . Learned a lot from that man.

Harbanger's picture

"who is going to buy it when its SUPER expensive and I need to sell?"

It would be super expensive because the buyers (locally/globaly) would be lined up and ready to pay that cash price.  You'll have no problem converting pm's to fiat.

noses's picture

"You'll have no problem converting pm's to fiat."


Except where it will be forbidden. 8-)

Zgangsta's picture

That's where black markets fill the need.

Praetor's picture

But at that stage with a high fiat price will be indicative the currency is dead, so there would be little point exchanging your gold at that time. It would be better to exchange your gold directly for hard assets during the chaos (skip the fiat swap in case fiat goes to zero) or wait to see a new currency formed and then convert some of your gold holdings.

A Nanny Moose's picture

Everybody has a price. Price discovery works at the transaction level too. What if nobody wants any price?

The Big Ching-aso's picture



The only problem I see with someday transacting in gold for everyday practical shit.............................

"Excuse me, but you would you happen to have change for a 4 lb bar of gold by any chance?"

"Yeah, wait here a second while I retrieve a 45 lb box of silver dollars, two chickens, 4 prime ribs, and a ruby earring."

Manthong's picture

You probably won't need to give up the prime ribs on that trade.

Deo vindice's picture

Depends on how hungry you are.

They might be the only thing of value at that moment.

prole's picture

When the Fiat Ponzi collapses, only those with gold eat, and those with food only accept gold in payment.

Now I am just guessing here that there will be other things they accept, like one's daughters, but when one has  gold it won't get to that

Confederate Currency not going to cut it, sadly

Overfed's picture

Silver is for small purchases.

sessinpo's picture

toady                         2383069

I'm a little worried about the other side with gold too... who is going to buy it when its SUPER expensive and I need to sell? I guess I just need to never 'need' to sell...



Actually, you may be using your PM as a currency itself. For example, I need some work done, I have some american eagles that I will trade you for your services. I need food, will you take my silver eagle in exchange for this amount of food. etc.

in4mayshun's picture

Oh freaking get real! When people are using gold to try to buy food were all royally f#!?$d.

Seer's picture

I'll agree that things would be pretty bad at that point, BUT... it's going to get bad any way that you look at it.

If there's a surplus of food available then yes, one could use gold to obtain it.  Price is likely going to be very high for many, and the REAL protection is to be able to grow your own food (to some degree): this is the case in ALL of human history; our modern area is a complete distortion.

Matt's picture

In Zimbabwe, people had to go into the hills and dig or pan for gold and diamonds to buy food during the end, after people stopped accepting $5 trillion bills and Germany wouldn't sell any more paper or ink for printing higher denominations.

IBelieveInMagic's picture

It works in a limited way. But, not when it is planet wide situation. Sorry, Gold is an archaic metal and will not revert to it's exalted position as this time it is truly different.

SilverRhino's picture

If you are actually able to put away an ounce or two a month then you ARE one of the rich people in the eyes of at least half of the population of the United States and most of the rest of the world.   

lunaticfringe's picture

Dude's full of shit. Hardly worth the words here.

Mamzer Ben Zonah's picture

An ounce or two a month is not much, quite a lot of people can do that without a problem. Good if you can stick to the discipline.

toady's picture

I do have problems with comsistemcy... last month I had to get some dental work done and could only get 20 oz pf silver, and months when property taxes are due I generally can't afford anything. At least two or three more months a year I get hammered woth unexpected bills.

But I'm trying!

gdogus erectus's picture

For sure, brother. I try to peel off an extra $3700 a month from my wages to buy gold too. If more people were disciplined like us, they would actually have some real savings.

Prometheus418's picture

That'd be an awesome amount of disicipline, considering that's my entire take-home pay, and I have to support a family of five with it.  

It's not always about disicipline- and don't give me any crap about being lazy or picking the wrong trade, I'm an aerospace engineer.  Being younger and living in a less populated area should not be an automatic sentance.

Those of us in my position get to ride the devil's metal, but at least we've got that- I'm just tired of the gold bugs looking down thier noses at the silver bugs.  It's like arguing over vanilla and chocolate- either way, we're all eating ice cream.  Better than storing wealth in commemorative Budweiser and Nascar mirrors, which seems to be the most common strategy in my neck of the woods.

Seer's picture

2/3 of the world's population lives on $3/day or LESS!

noses's picture

For a planet that is specified to be able to support a population of less than 1 billion people (without getting damaged in the process) that's quite some achievement.

smiler03's picture

For a planet that is specified???

Have you got the Earth's Owners Manual? Dork.

Likstane's picture

Have you addressed AKAK or Diogenes response to your ignorant comments regarding the value of gold in any time period or are you going to ignore your fallacious remarks as if they weren't made?  Either tap out by admitting your error or continue fighting.  This is fight club, not run away club. 

scatterbrains's picture

How many meals does that translate into when an ounce of silver jumps 10 fold and those hunger stats of yours move stateside?

Uchtdorf's picture

Toady, think of it this way: Gold is not "just too much." FRNs are just too little. Alternatively, think of it as, "they're giving away perfectly good gold coins for perfectly worthless FRNs.

toady's picture

That's my thinking.

About once a month I take every extra frn (except a few thousand slush fund) to the coin store and load up.

cristo's picture

if you can afford an ounce or two a month you're the rich people

Matt's picture

I wouldn't say having $50K per year in disposable income is really rich, but certainly better off than the vast majority.