A reader forwards the Sage’s assessment of the shiny metal:
It gets dug out of the ground in S. Africa or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.
25 responses so far
1 sinz54 // Oct 22, 2009 at 9:48 am
Reportedly, Warren Buffett lost nearly half of his own personal fortune in the 2008 economic meltdown.
David, why on earth are you railing against gold investing? What does that have to do with “Building a conservatism that can win again”???
2 ottovbvs // Oct 22, 2009 at 9:50 am
……..Very true……it has little utility other than to put around women’s necks or fingers……but for better or worse it’s a perceived store of value by many and thus a fundamental part of the world monetary system…….not as fundamental as in the twenties thank god and really not very important economically when you get right down to it.
3 ottovbvs // Oct 22, 2009 at 9:59 am
sinz54 // Oct 22, 2009 at 9:48 am
‘Reportedly, Warren Buffett lost nearly half of his own personal fortune in the 2008 economic meltdown.’
….What’s this supposed to prove……Warren Buffett doesn’t know what he’s talking about when it comes to investing? …….According to most reports it was about 30% because most of his wealth is tied up in BH stock…….now since the market declined by about 54% at it worst that means he substantially outperformed the market which in case has recovered 45% of it losses and so reduced Uncle Warren’s losses to around 15% still leaving him well ahead of the market ………LOL
4 WillyP // Oct 22, 2009 at 10:19 am
Well, Warren very much disagrees with his own father, in this case. From Wikipedia:
“Although his son Warren Buffett has criticized investing in gold because he believes that investing in businesses does more social good, Howard Buffett was a proponent of the gold standard.”
Discussion of a gold standard/gold as an investment deserves a more serious treatment than political hackery serves to accommodate. Suffice to say, however, that David Frum is impressively unqualified to lead these discussions.
I’m going to echo, and then proffer an answer to, Sinz here: What’s with all this gold discussion on NM? Why can’t David go back to offering lame policy recommendations instead of worse investment advice?
It shouldn’t be too hard to figure out. The majority of David’s site viewers are not of ideological kinship, but instead people who find him laughably pathetic and, possibly pathetically as well, comment incessantly on his many indefensible positions. Perhaps it’s a form of vanity on our parts? I don’t think heckling the runt of the GOP is much to brag about, anyway.
5 WillyP // Oct 22, 2009 at 10:21 am
Oh right, so why does David always post these stories about Rush, Fox News, Mark Levin, Ron Paul, tea partiers, Glenn Beck, etc.? It’s because they incite passionate responses from people, whereas Frum left to his own devices couldn’t work up a 3 year old in anticipation of a lollipop.
Marketing, pure and simple.
6 ottovbvs // Oct 22, 2009 at 10:47 am
WillyP // Oct 22, 2009 at 10:19 am
“Well, Warren very much disagrees with his own father, in this case. From Wikipedia:
“Although his son Warren Buffett has criticized investing in gold because he believes that investing in businesses does more social good, Howard Buffett was a proponent of the gold standard.”
………….Duh
7 WillyP // Oct 22, 2009 at 12:01 pm
Says otto “……..Very true……it has little utility other than to put around women’s necks or fingers……but for better or worse it’s a perceived store of value by many and thus a fundamental part of the world monetary system…….not as fundamental as in the twenties thank god and really not very important economically when you get right down to it.”
It’s the world’s preeminent money. How does it have LITTLE utility? PERCEIVED store of value? It has held its value over millennia. Considering that most people you interact with on a daily basis is through monetary exchange, I think it’s very important to consider.
8 ottovbvs // Oct 22, 2009 at 2:29 pm
WillyP // Oct 22, 2009 at 12:01 pm
“It’s the world’s preeminent money. How does it have LITTLE utility? PERCEIVED store of value? It has held its value over millennia.”
……….It’s not the world’s pre-eminent money(otherwise I’d be paying for gas with gold dollars) it is however a store of “perceived value” which is why the total current value of world gold stocks is around $5 trillion which is just about the total value of cash of all kinds in circulation around the world. This doesn’t however include the value of other financial instruments denominated in any currency ie. mainly credit which is money by another name. For example the total US debt when Bush left office was about 10.5 trillion or twice the value of world gold supplies…….. Money is totally untethered from gold these days for all practical economic purposes although the aggregate value of gold has tended to track the amount of money in circulation…….it’s bit irrational as Uncle Warren is pointing out but there it is………the value of gold and the amount of gold in existence (about 160,000 tons have been dug up) have absolutely zero impact upon or relevance to monetary management by any of the world’s leading economies…….therefore apart from jewellry, solder and some other industrial uses it has zero utility.
9 Churl // Oct 22, 2009 at 4:38 pm
sinz54 asks, “David, why on earth are you railing against gold investing?”
Perhaps because Glenn Beck advertises for some sort of gold trading.
I hope for the sake of the household hygiene of Frum’s followers that Beck doesn’t start advertising toilet paper.
10 ltoro1 // Oct 22, 2009 at 7:40 pm
My thoughts:
1. This website is, overall, short on substance.
2. One does not neccesarily need to be in favor of the gold standard to view gold as a good investment. Nor would one in favor of a fiat currency neccesarily be in favor of holding dollars.
3. Personally, and I think this is probably Warren Buffet’s point, I prefer investments that have an underlying cash flow such as stocks, a small business, or even real estate as the core of my portfolio.
4. I believe that gold or other commodities can be a good investment. Especially, if they are negatively correlated to other parts of my portfolio. However, as stated above I would not want it to be a core part of my portfolio.
5. This being said, I wish I had gotten into gold when Sinze did back in 2003. At this point I think it is a little too late and we either are or will have a bubble soon. Of course, I called the peak in the housing bubble 4 years early, so that shows what I know.
6. Unlike some others on this post, I wish there was more discussion of monetary policy including the gold standard.
11 ltoro1 // Oct 22, 2009 at 7:47 pm
Some additional thoughts on the David Frum’s comments on the gold standard:
1. David Frum thinks that pegging the dollar to gold is crazy, but does he thinks that nations that peg their currency to the dollar are crazy?
2. A gold standard is simply a system of fixed exchange rates. Europe with the euro has a system of fixed exchange rates (Italy can no longer float their currency relative to the French franc). Does he think this is crazy?
3. In fact, within the US, we have a system of fixed exchange rates. A dollar in Florida buys one dollar in California. Is this crazy?
I would like to conclude by saying that I am neither a proponent or opponent of the gold standard, but I would like to see a more substantive discussion of its merits or lack of.
12 ottovbvs // Oct 22, 2009 at 8:04 pm
ltoro1 // Oct 22, 2009 at 7:40 pm
“4. I believe that gold or other commodities can be a good investment. Especially, if they are negatively correlated to other parts of my portfolio. However, as stated above I would not want it to be a core part of my portfolio.”
…………For those that like the idea it’s not unreasonable for gold to be a minor part of a portfolio…….but there have been periods like the 90’s when it was a horrible investment…..as for the gold standard……the idea of linking monetary management to a finite resource precious metal that is dug out of the ground is basically insane in the 21st century…….conceptually it has certain advantages I’ll admit and it even works reasonably well when you have a world economy that looks like that that existed in the 19th century and as long as you don’t mind huge and long lasting (like 20 year) recessions……but the 21st century world economy doesn’t bear the slightest resemblance to that of the 19th century
” 5. This being said, I wish I had gotten into gold when Sinze did back in 2003. At this point I think it is a little too late and we either are or will have a bubble soon. Of course, I called the peak in the housing bubble 4 years early, so that shows what I know.”
…….I wish I’d won the lottery…….I called the housing peak almost exactly (late 2006) but the market didn’t peak until 18 months later………..I bailed nearly a year too early…..but better early than never as events turned out ……gold currently has a little upside because of dollar depreciation but it’s not much…..oil futures look much more promising…….the buck is going back to about a Euro 1.65…….which (shock horror) is where it was in the spring of 2008 when (shock horror) George Bush was president.
13 ottovbvs // Oct 22, 2009 at 8:17 pm
11 ltoro1 // Oct 22, 2009 at 7:47 pm
“2. A gold standard is simply a system of fixed exchange rates. Europe with the euro has a system of fixed exchange rates (Italy can no longer float their currency relative to the French franc). Does he think this is crazy?”
…………The ECB could change the Euro’s exchange rate overnight if it wanted too…..indeed it might have too if the dollar slips too far ……..Of course Italy and France can’t change exchange rates they are both in the Euro…..that would like saying CT and TX are going to alter dollar values…….being tied to gold is an entirely different matter ……..no credible economist I know of thinks going back on gold is either viable or a good idea.
14 phesoge // Oct 22, 2009 at 11:41 pm
David is always Railing on GOld because he belives Gold is to be identified with libertarians. And Why does he hate Livertarians because they dont support his Insane NEo Con Foreign policy. I actually think David thinks Tel Aviv or Jerusalem is the capital of the U.S
15 ltoro1 // Oct 23, 2009 at 12:13 am
ottovbvs, the ECB does not directly control the exchange rate of the Euro, it would have to influence to price of the Euro by trading on the open market. Oddly enough, this is what they woud have to do if they were on the gold standard or any other commodity based standard.
Also, let’s not forget that we were on the gold standard from WWII through the early 1970s (please feels free to correct my exact year, I know it was during the Nixon administration) which over the course of history was not that long ago. Complete, total, and idefinite fiat currency is relatively new.
Again, I am not advocating a preference.
16 WillyP // Oct 23, 2009 at 10:04 am
Is it so hard to understand that a) gold works perfectly well as money and constrains government spending because it is limited in supply, and b) war is not caused by going off a g0ld standard, but that often governments will go off the gold standard to fund wars ????
These are elementary facts that must be grasped and understood before all sorts of vicious, slandering comments are thrown at people, Frum included. I don’t believe Frum is a warmonger anymore than Bush was. Some would say both are; I disagree.
It’s hard for me to understand how people who are genuinely uninformed on economic and monetary theory all of a sudden have opinions they’re so happy to defend. Personally, I wouldn’t start blogging on veterinary medicine because I have no understanding, yet many here seem to take that same swagger into every policy discussion, even if they know demonstrably nothing.
Or maybe it’s as Reagan said (I paraphrase) – It’s not that our liberal friends know so little, but that they know so much that isn’t true.
17 sinz54 // Oct 23, 2009 at 10:35 am
ottovbs:
Nothing wrong with that. It’s always fine to bail out after you’ve taken enough profit, that’s all.
I bailed out of the U.S. stock market in 1998, two full years before the dot.com bubble burst. But I’m not sorry I didn’t hang in there longer. Too rich for my blood, as the gamblers say.
http://www.youtube.com/watch?v=kc0xQfi4vPA
18 ottovbvs // Oct 23, 2009 at 4:37 pm
15 ltoro1 // Oct 23, 2009 at 12:13 am
“ottovbvs, the ECB does not directly control the exchange rate of the Euro, it would have to influence to price of the Euro by trading on the open market.”
……………The ECB manages Euro rates constantly in the open market…….So if a Euro devaluation was ever necessary whose decision would it be?
19 ottovbvs // Oct 23, 2009 at 4:53 pm
WillyP // Oct 23, 2009 at 10:04 am
” b) war is not caused by going off a g0ld standard, but that often governments will go off the gold standard to fund wars ????”
……..The economic collapse in the thirties which did huge damage to the world economic system and allowed fascism to emerge, and ultimately caused the greatest war in human history, was largely precipitated by a blind adherence to the gold standard……….today it would be a major brake on economic growth…..China has roughly the same amount of gold stocks as Switzerland to underpin economic activity in the world’s second largest economy
” It’s hard for me to understand how people who are genuinely uninformed on economic and monetary theory all of a sudden have opinions they’re so happy to defend………Or maybe it’s as Reagan said (I paraphrase) – It’s not that our liberal friends know so little, but that they know so much that isn’t true”
………Perhap with your expert status you could tell us why a majority of economists (not to mention the uninformed Mr Buffett) regard the idea of a return to the gold standard as off the wall…….lack of information?
20 WillyP // Oct 23, 2009 at 5:25 pm
actually, expansionary monetary policy caused the boom/bust cycle that triggered the 1929 crash. the gold standard provides for honest and stable money.
why?
entrenched interests. do you find that hard to believe?
21 ltoro1 // Oct 23, 2009 at 7:51 pm
ottovbvs, actually I am pretty sure the ECB lets the Euro float against all other currencies. Exchane rates are only fixed within the Eurozone. But yes, if they were to devalue relative to the dollar, for example, they would do it through open market operations. However, the process would be really similar if they were on the gold standard and they were going to devalue relative to gold.
Both opponents and proponent of the gold standard should not get too mystical about it. The gold standard is a system of fixed exchange rates, nothing more nothing less.
22 ltoro1 // Oct 23, 2009 at 7:56 pm
WillyP, we were actually on the gold standard in 1929. Contrary to what Ron Paul may say, we still had boom and bust cycles when were on the gold standard. You can even have expansionary money policy and inflation while you are on the gold standard.
23 ottovbvs // Oct 24, 2009 at 2:46 pm
21 ltoro1 // Oct 23, 2009 at 7:51 pm
“ottovbvs, actually I am pretty sure the ECB lets the Euro float against all other currencies.”
……….It does……although they also execute some discreet open market management I believe
“actually, expansionary monetary policy caused the boom/bust cycle that triggered the 1929 crash. the gold standard provides for honest and stable money.”
……….There were many things that triggered the 1929 crash…..technically speaking you’re correct about a causal link in that credit is money by another name, but it was more complicated than that…..basically it was exactly the same problem as this time around…….namely too much credit and then not enough of it……..the US was on the gold standard and had plenty of leeway to expand money supply domestically at the fixed rate without going off gold, since at the time they had about 60% of world gold stocks…..the reason it turned into a debacle was that when the crash occurred and there was a crisis of confidence and credit froze up they didn’t expand the money supply (or “flood the market with liquidity” as Bernanke and the other central bankers did this time) and hence they embarked on a deflationary spiral etc etc…….If the Fed had applied Bernanke’s policies in 1929-32 the depression if not avoided completely would have been massively reduced in severity …….the rest of the world apart from France didn’t have sufficient gold to maintain their currencies at previously fixed too high rates and wasted vast amounts of money(much of it borrowed) defending their currencies against speculators while imposing demand reducing policies at home to satisfy creditors that in turn induced deflation …….this is all very well described in that book Lords of Finance that was actually written by my daughter’s former boss.
“Both opponents and proponent of the gold standard should not get too mystical about it. The gold standard is a system of fixed exchange rates, nothing more nothing less.”
……..No mysticism involved……….your definition is correct as far as it goes…….the problem is that it’s an overly rigid and not very efficient system of monetary management despite it’s claimed benefits (ie. the cure is worse than the disease)…….hence there is no chance whatever of it being re-adopted whatever fantasies may be nurtured in some bosoms.
24 WillyP // Oct 24, 2009 at 7:35 pm
otto, you may be correct that we’ll never again be on a gold standard. However, if there is such a thing as the future for humanity, and assuming we do not manage to escape the shackles of scarcity, then the only alternative is no standard. Political revolution will bring about one thing or the other, eventually.
This is because there is only so much inflating a government can do until the money is abandoned. The necessity of useful money shows itself bare throughout a hyperinflation. During this process, which can be described as nothing less than awful, people gradually abandon a currency in order to find new ones; one that has not lost all essential qualities a money must possess.
The hard thing to explain to people who look at economics as a set of rules to be found not in nature but in a textbook is that the laws are incontrovertible and omnipresent. Money serves a real societal function only when it possesses certain qualities, one of them being to maintain a relatively stable purchase power, or value, over time. This is typically found in the most commonly exchanged commodity (along with other essential qualities). Cattle, tobacco, gold, wampum, tea, cigarettes – these have all been used as money. All of this figures in to rebutting your argument for continued credit expansion argument because credit is in practice loaned money.
You are correct that there were there were boom/bust cycles on the gold standard, but to suggest that this fact proves me wrong is to misunderstand the critique. I advocate adopting a gold standard (when amenable) and abolishing the Federal Reserve (and, to be complete, eliminating the banking industry’s legal monopoly on fraud – i.e., fractional reserve banking) because they all encourage destructive behavior. (Note: ending legal tender laws would accomplish much of this, as well.)
I’ve found in the past that I lose most people here. It’s because the suggestions are radial by today’s standard, although mainstream by historical standards, that most people cannot begin to conceive a more productive order. The stock argument of Bernanke is ultimately wrong, and potentially fatal. He’s thrown caution to the wind and is gambling with the relevance of the dollar.
Two very serious treatments of this topic are:
1) Theory of Money and Credit by Ludwig von Mises – pub. 1912
2) Money, Bank Credit, and Economic Cycles by Jesus Huerta de Soto – pub. 1997 (?)
I don’t claim to have read either cover to cover, but have read much Mises, Rothbard, monetary theory, and critiques, and I may say these two works are likely the best resources you’ll find.
Finally, please don’t lump me in with Ron Paul.
25 WillyP // Oct 24, 2009 at 7:50 pm
Reading that over, maybe I was not explicit enough. The creation of purchasing power (money, credit) out of this air misshapes the productive structure of society, and when enough people realize it is no longer functional, the fiat money used to accommodate this practice will be abandoned. Additionally, when a non-fiat money is lent out at multiples, there is a creation of purchasing power, specifically in the form of credit, that causes a general price rise, leading to a crack up boom. The apogee of consequences precipitated by the expansionary action is described by Mises:
“‘This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.’
“But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against ‘real’ goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.
“It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.”
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