A Brief Comment On Satyajit Das and Gold

Thank you Pater for writing a very interesting response to Satyajit Dat's piece, and as usual it is very well researched. This topic is near and dear to my heart as the president of Gold Standard Institute USA.

I think Pater's first point is the essential. Paper or electronic digits are promises. When someone works to produce something, he wants to trade it for something else. He will not willingly give it away for free.

The problem of the "coincidence of wants" is that the developer of computer software cannot directly trade software for bread and cheese.  He must trade indirectly: GoodA –> Money –> GoodB.

Money is the most marketable good, the one with the smallest loss due to the bid-ask spread, the one good everyone knows will be accepted by any vendor of anything.  The market selected gold thousands of years go to be this monetary good, and still continues to select even today.

 

What happens if the government says "you cannot use gold, you must use our paper"?  Their paper is not a good, it is just a promise.  What happens when the promise is dishonored?  Is this not inevitable if they keep issuing more promises to pay off old promises, and do not have the means nor intent to repay?

This get to my favorite point.  Gold today is prevented by governments from being an investment.  An investment is something that you buy to earn a yield, like a dividend stock or a commercial building with rent-paying tenants.  But gold has no yield.

People today buy gold for two very different reasons: either because it is money or to speculate on its price.

One holds money because one prefers it to the alternatives.  Today Treasury bonds offer no return on capital, high-yield bonds may not offer return *OF* capital, real estate is still declining, and stocks are bid up due to falling interest rates but face an endless onslaught of destructive taxes, regulations, lawsuits, and risks of labor action, adverse FX moves, etc.  None of these are attractive investments (though they may make good speculations).

One speculates hoping the price will go up. I think it is a mistake to think of the gold "price". Gold is like a precision meter stick made of stainless steel. The dollar is like a rubber band, with inches marked in crayon.  What does it tell you if you "measure" the meter stick one day and the rubber band reads "32 inches" and the next day you do it again and it reads "42 inches"?

Holy #*&%&! Batman, the length of the meter stick keeps changing!!!

It is not gold that is volatile, it is the dollar with which most people think to "measure" it.  As the dollar goes off the rails, it becomes more and more volatile and therefore its "measurements" of other things becomes more volatile. The dollar is manifestly unsuited as a unit of measure.

A rising gold "price" is not a profit.  It is just the loss of the dollar–and one must pay taxes on the "gains", adding insult to injury!  This is not to say that one cannot trade gold against the dollar.  If one can consistently can pick the peaks and troughs one can produce a steady income.  But buying and holding is not profiting, it is just watching the decline of the dollar.

Incidentally, using dollar-based consumer price indexes to measure gold is even worse. Consumer prices are affected by numerous forces, some pushing them upwards and some downwards. These include increasing industrial efficiency, new regulations, increasing demand, new taxes, changing consumer tastes, moratorium on oil drilling in the Gulf of Mexico, new technologies, prohibition of business restructuring, etc.

Using consumer prices to "adjust" the "price" of gold is like lining up Gummy Bears next to the meter stick, being careful to estimate the fraction of a bear at the end.  It is even less accuracy-prone than the dollar itself, from which these prices are derived.

I think everyone must be clear on the distinction between a gold bug and an advocate of the gold standard.  The former just wants a rising gold "price" (and often does not want a gold monetary system).  The latter is not thinking about the gold price.

What was gold price in the 13th century? How many angels are dancing on the tip of this pin?


 

 

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7 Responses to “A Brief Comment On Satyajit Das and Gold”

  • jimmyjames:

    A rising gold “price” is not a profit. It is just the loss of the dollar–and one must pay taxes on the “gains”, adding insult to injury! This is not to say that one cannot trade gold against the dollar. If one can consistently can pick the peaks and troughs one can produce a steady income. But buying and holding is not profiting, it is just watching the decline of the dollar.

    ***************

    Keith-the dollar is trading USDX around 0.80 which is where it was on 2005 and gold is trading today at $1700 and it was trading in 2005 at $450-
    So how can you say buying and holding gold is not or has not been profitable-

    • Crysangle:

      Differences of perception – until you trade the gold into dollars again you have not profited . If we turn the idea around we could say that we have been watching the decline of the SDX vs. gold too .

      • jimmyjames:

        Differences of perception – until you trade the gold into dollars again you have not profited . If we turn the idea around we could say that we have been watching the decline of the SDX vs. gold too .

        *******

        I suppose we could also say that until you draw your savings from the savings account-they are not really savings-
        Sometimes I wonder what brings people to use the most lamest excuses as to why holding gold has not been profitable and why it is so risky- in spite of our author pointing out constantly that it is and has been for 11 years a low risk/high reward play-

        • Crysangle:

          Gold is not risky , it just doesn’t fit with current monetary attempts to resolve accounting (cannot be printed) , and such is the way of things that some people think that that is a disadvantage . Maybe investors looking for profits will judge it as risky compared to what its dollar value will be in a month , but as a saving , or holding long , it is reliable . The treasuries of several countries seem to agree by hoarding gold – and I don’t think they will sell it just to obtain some fiat which they can print freely (though Spain previously sold – probably because under the Euro it could not print) , if countries sell it might be to devalue their currency (but which they can also do by printing ) , or out of corruption, during war . In short I don’t think they will sell their gold reserves en masse as it is part of what underpins national wealth and authority , and the value of the national fiat. That seems a quite reliable store of wealth to me – it is just a very different world to fiat valuation and understanding .

          • JasonEmery:

            The confusion stems from the fact that gold (and even more so silver) has (have) been partially demonetized since 1971. Yes, gold and silver are money, and have been, continuously, for thousands of years. But fiat is more convenient, and in some cases it is mandatory to use (legal tender situations).

            So gold and silver, physical, ETF, or Futures contracts, have been profitable in this context of partial demonetization. But from the standpoint that gold is money, it cannot be said to be profitable, unless you lease it out and get a return.

            Since we are firmly into the hyper inflationary phase, monetary metals will soon start to go way up, relative to fiat, but it would be a mistake to sell into that strength, IMHO. Fiat is going to die or be restructured, whichever comes first.

            As long as the USA is a representative democracy, deflation is impossible. The obligations that are likely to fail, such as student loan debt, credit card debt, municipal bonds, etc. are in the hundreds of billions, maybe low single digit trillions. The unfunded liabilities of social security, medicare, etc., which MUST eventually be funded with ‘out of thin air’ fiat, are in the hundreds of trillions. Two orders of magnitude higher.

            My guess is that we will be forced into some sort of fascist dictatorship or swept up into some sort of 1-world socialist republic. But in that case, the USA dollar vanishes, or is redeemed for pennies on the dollar.

    • Keith Weiner:

      jimmyjames: Gold is money and the dollar is paper credit, falling fast.

      Think about the “length” of that steel meter stick “changing”, when you measure it with the rubber band marked in crayon every day. If the steel gets “longer” would you count that a gain in steel?

      • jimmyjames:

        Keith–my point is that from 2005 the dollar has traded in the same range and gold has increased in price-for eg: if you bought 1 oz. of gold in 05 for $450 and sold it today for $1700..it was a profitable trade-nothing more-of course some items are more costly in dollars now-but for instance-you can buy more house for your dollars than in 05 and you can buy a lot more house today for your gold than in 05-in fact nothing that i know of has risen when weighed against gold and has in fact decreased-simply put gold has outperformed the dollar which has stayed relatively flat over the same period-so by saving in gold people have made gains in “$ buying power”-in other words it has been a profitable trade and yet you say it hasn’t been-

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